Baroness McIntosh of Hudnall: My Lords, I thank my noble friend for that reply. He will be aware that his predecessor and other Ministers have consistently denied that the Government are pursuing a predict-and-provide approach to airport expansion or to any other form of transport infrastructure. Does he agree, however, that BAA's rationale for the expansion of Stansted Airport is based entirely on that rather discredited planning model, as the language of its public documents reveals? Is he aware that if Stansted Airport is expanded, carbon emissions there will rise from the present5 million tonnes per annum to 12 million tonnes per annum? In view of everything we now know about the urgency of addressing climate change, not to mention the devastating impact of the expansion on local communities, will he explain why the Government are still supporting BAA's ambitions in this arena?

Lord Bassam of Brighton: My Lords, we recognise the need to address climate change, as the Stern report makes clear. We have to balance the important economic driver that airport development is with our environmental obligations. We fairly set that out in the response to the 2004 White Paper in the follow up report that was published last December.

Lord Bassam of Brighton: My Lords, of course there will be impacts from any increase in journeys and visits through Stansted Airport. We clearly have to take very careful accounts of those. The planning inquiry process does exactly that.

Lord Hanningfield: My Lords, the Conservative Party has a policy on Stansted Airport; it is "no second runway". My leader and the shadow Secretary of State for Transport that the Conservative Party announced a policy for no second runway at Stansted; I make that quite clear to this House.
	Last week it was announced that there would be a new runway on the M11, costing something like£50 million. Yet we desperately need infrastructure for other things in Essex. Would the Minister support investing in that roundabout rather than in other infrastructure in Essex?

Lord Bassam of Brighton: My Lords, I am rarely completely puzzled by questions from the Opposition, but did I hear the noble Lord correctly? I thought he asked whether we invest in a new runway on the M11. I do not know if that was the question, but it seems a bit wide of the mark if it was.

Lord Davies of Oldham: My Lords, there is a limit to what we can do. First, we cannot avoid the fact that foreign lorries can have such extensive fuel capacity that they can fill up and spend the whole of theirtime in the United Kingdom using fuel that has been purchased abroad. There is no obvious solution to that. The second problem posed by foreign lorriesis that we must be able to enforce the law with regard to them. That is why we introduced in the 2006 legislation the potential for on-the-spot fines. However, I think the noble Lord will recognise this limitation: we are bound by European legislation and can force foreign lorries to meet only the costs that they incur in relation to the maintenance of the roads. We are not allowed to introduce whatever charging system we wish for foreign vehicles.

Lord Bradshaw: My Lords, one way in which you can cater for people is to plan properly for the future? The high-level output statement to be published in the summer, to which the Minister referred, provides for a 30 per cent growth in the next 10 years, whereas we have had 42 per cent growth in the past 10 years and the curve is rising steeply. The cross-country franchise, to which the noble Lord opposite referred, provides for a 30 per cent growth over 10 years, which is not enough. Will the Government take effective action to plan for the future?

Lord Hanningfield: My Lords, does the Minister agree with the comment made by Dr Mike Mitchell, director general of the Rail Group at the Department for Transport, that rail commuters with only a 30-minute journey cannot expect to have a seat?

Lord Bassam of Brighton: My Lords, I am reluctant to agree with that observation because the objective must be journeys which are as comfortable as possible. Of course, there has been a longstanding commitment to achieve that objective, which goes back to the noble Lord's party being in Government. The commitment was simply that no one should have to stand for more than 20 minutes, which is right and fair.

Viscount Simon: My Lords, is my noble friend aware that the railway operator One Railway, which operates to and from Stansted airport as well as in various other areas, is proposing to cut out stops at all the intermediate stations between Liverpool Street and Stansted airport and notwithstanding that reduction will increase by only two stopping services between Liverpool Street and Stansted? Commuters are going to have a hell of a time getting to and from London.

Lord Bassam of Brighton: My Lords, my noble friend's question goes back to the original Question and I can understand why he has conflated the two issues. I understand that in any expansion plans for Stansted, the airport operator will have to bring forward practical and sensible measures to address the increased capacity that will be required on the rail network.

Baroness Scotland of Asthal: My Lords, the Prevention of Terrorism Act 2005 received Royal Assent in March 2005. The Act provides for control orders to address the risk posed to public safety by individuals believed to be involved in terrorism who can be neither prosecuted nor deported. The purpose of the order before us is simple. Today's renewal debate is taking place in accordance with Section 13 of the 2005 Act. The powers in the Act will automatically lapse after one year unless renewed by order subject to affirmative resolution in both Houses. They were renewedlast year but, without this new order, will lapse on10 March 2007. The effect of the order is to continue the powers in force until 10 March 2008. The other place voted in favour of renewal on 22 February. As there is a serious issue before us, I shall expand on the specific need for the powers to continue.
	As noble Lords will know, there is a serious and sustained threat from international terrorism to the United Kingdom and United Kingdom interests overseas. The current threat level is assessed as severe. An attack is judged to be highly likely. Moreover, since the tragic events of July, the police and Security Service have had considerable success in disrupting alleged terrorist plots.
	Prosecution is regularly mentioned in this context, not least by the Joint Committee on Human Rightsin its report published yesterday—and rightly so. We shall of course respond formally to the Joint Committee's report, but I reassure all noble Lords that prosecution remains the Government's preferred option for tackling individuals involved in terrorism. That is why the Government have strengthened the ability to prosecute for involvement in terrorism-related activity in the Terrorism Act 2006. It is demonstrated by the fact that, in 2006, 85 individuals were charged after being arrested under the Terrorism Act 2000 or other legislation, when the investigation was conducted as a terrorist investigation.
	Similarly, we seek to deport foreign nationals involved in terrorism, but that will sometimes not be possible, even with the memoranda of understanding or other agreements that are in place with a number of countries to enable us to return individuals safely to their countries of origin. Consequently, there will remain a comparatively small number of individuals for whom neither prosecution nor deportation is viable and who the Security Service assesses are involved in terrorism and pose a risk to public safety. Without control orders, those individuals would be free to continue to engage in terrorist-related activity. That is a risk that the Government are not prepared to take.
	I remind noble Lords that voting against renewal without having an alternative in place would expose the public to that risk. I would also ask what alternative noble Lords would have in its place. I emphasise that the legislative proposals suggested by honourable Members in another place to strengthen prosecution powers would not remove the need for control orders. That assessment of the necessity of control orders is shared by the noble Lord, Lord Carlile of Berriew, whose annual report on the operation of the Act was published on 19 February. In paragraph 7, he states:
	"I would prefer it if no control order system was necessary. However, in my view, it remains necessary given the nature of the risk of terrorist attacks and the difficulty of dealing with a small number of cases. Control orders provide a proportional means of dealing with those cases, if administered correctly".
	We would respectfully agree.
	I also place on record the Government's gratitude to the noble Lord, Lord Carlile, who has produced another carefully considered, valuable report, which should inform today's debate. The two other statutory consultees—the director-general of the Security Service and the Intelligence Services Commissioner—are also content with the intention to renew the legislation. However, as I know that the issue has caused much concern, I underline to the House that control orders have been successful in preventing, or at least limiting, these individuals' involvement in terrorist-related activity. That view is shared by the Security Service. No one is pretending that control orders are 100 per cent effective. They are weaker and less effective than we would want, not least because of recent court judgments. As a result, there is inevitably a real risk that individuals on control orders will re-engage in terrorism or abscond. Indeed, there have been three well-publicised absconds. The noble Lord, Lord Carlile, addresses that point cogently in his report, in paragraph 59, where he says that,
	"the disappearance of a small minority does not necessarily undermine the benefits of the orders in relation to the majority".
	More encouragingly, the police, the prosecution authorities and the courts take enforcing control orders seriously. In January, the courts sentenced an individual to five months' imprisonment for breaches of his control order. Charges against other individuals are pending.
	So the need for the powers is clear. Parliament can also be reassured that a comprehensive set of safeguards are in place under the Act to ensure appropriate use of the powers. Indeed, we remain firmly of the view that the legislation and the order before us today are fully compliant with the ECHR. The Act provides full judicial oversight and rights of appeal. The courts must give permission for the Secretary of State to make a non-derogating control order or confirm within seven days an urgent control order made by the Secretary of State. There is automatic, independent judicial review of the decision to make or renew a control order. Individuals subject to control orders can appeal the Secretary of State's decision to modify a control order, and apply themselves to have one revoked or modified where there is a change in circumstances—and can appeal the Secretary of State's decision.
	Some people have previously questioned the sufficiency of the safeguards put in place by the Act, but events over the past year demonstrate the robustness of those safeguards. Noble Lords will be well aware that the judiciary has been actively overseeing the Act. First, we welcome the Court of Appeal's conclusion in August 2006 that the judicial review procedure within the Act was compatible with Article 6 of the ECHR; that is, the right to a fair trial. That overturned an earlier High Court ruling against the Government.
	Secondly, the Court of Appeal upheld an earlier High Court decision that the particular control orders imposed on six individuals breached Article 5 of the ECHR; that is, the right to liberty. Noble Lords will be aware that the Government have appealed that decision, and both those points of law will now be heard by the Judicial Committee of your Lordships' House in due course.
	Thirdly, there have now been three control order review hearings in which all the substantive evidence has been put before the courts. Previous hearings had dealt only with legal issues. The High Court handed down judgment on the first such case on 16 February. We were of course disappointed that the order was quashed. The judge himself agreed that the individual was reasonably suspected of being a terrorist, and that the decision to keep the individual under a control order on an ongoing basis was necessary. Noble Lords will be aware that an appeal on that is pending. Meanwhile, to protect the public, we have made a new, albeit weaker, order against this individual in the light of the judgment.
	The reports of the noble Lord, Lord Carlile, remain as valuable a safeguard as ever. We are constantly seeking to improve the way in which we administer control orders. The noble Lord's new report includes some specific recommendations which we will consider carefully, consulting interested parties as necessary. We will respond formally to the noble Lord in due course. The recommendations include suggestions of areas for possible legislative amendment which we will of course examine.
	In addition, the noble Lord, Lord Carlile, notes the need for an "exit strategy" so individuals are not subject to control orders indefinitely. Control orders are valid only for a maximum of 12 months at a time. Indeed, following the noble Lord's recommendation last year, we established the control order review group to keep all control orders under quarterly, formal and audited review. This helps to ensure that obligations in control orders remain tailored to the individual, necessary and proportionate. Of course, if the individual is no longer considered to represent a significant risk, the control order would be revoked.
	The noble Lord, Lord Carlile, states his belief that there is a need for thorough, documented consultation in every case on whether a prosecution could be brought against individuals subject to a control order. Before making an order, the Secretary of State always consults the police on whether evidence is available that could realistically be used for the purposes of prosecuting the individual for a terrorism-related offence. But the Government, with the police and the CPS, will review consultation procedures in the light of the recommendation of the noble Lord, Lord Carlile, and the recent court judgment on this issue.
	To sum up, the Government believe that control orders are necessary to address the continuing threat posed by terrorism. This belief is supported by the independent reviewer, the noble Lord, Lord Carlile,in his annual report. He explicitly reiterates his conclusion from his previous report when he states:
	"I remain of the view that, as a last resort (only), the control order system as operated currently in its non-derogating form is a justifiable and proportional safety valve for the proper protection of civil society".
	The Government's role, first and foremost, must be to protect the public. Control orders help to achieve that while maintaining the necessary safeguards to protect individual rights. I commend the order to the House.

Lord Dholakia: My Lords, the Government have not replaced control orders with new measures to strengthen the ability to prosecute terror suspects in our courts, and the Minister gave no indication when changes are likely to happen. We have consistently criticised these measures, and we have previously voiced our two major concerns. The first is about the standard of proof, which we want to raise from the Home Secretary's standard of "reasonable suspicions" to a standard based on "the balance of probabilities". Secondly, non-derogating control orders should have to be granted by a judge and not by a politician.
	I am seriously concerned that our criminal justice system, which has served us well, can no longer be trusted and that the Home Secretary should exercise powers indefinitely to detain suspected international terrorists. In key areas of its responsibility, the Home Office has failed miserably. Look at the mess in immigration and asylum statistics, the fiasco surrounding the deportation of foreign prisoners and the files that were never recorded on police computers. I am more likely to place my faith in the judicial system than in the Home Office. Surely we are not seriously saying that our judicial system cannot deal with 18 individuals who are now the subject of control orders.
	The House of Lords Judicial Committee declared these provisions incompatible with the Human Rights Act. I can well understand the Home Office's intentions, which are to provide a lesser restriction on freedom than imprisonment, and to ensure that the powers are non-discriminatory in their application. However, I am still puzzled as to why it is not possible for our courts to exercise these powers.
	We secured substantial changes to the Prevention of Terrorism Act 2005 during its passage, including a commitment to bring forward further legislation to extend the range of criminal offences, with the object of allowing individuals to be brought to court instead of being subjected to extraordinary and extra-judicial powers. The promise of a full review of terrorism legislation a year after the 2005 Act was abandoned by Charles Clarke in February 2006. However, under the current Home Office regime, it is no longer clear that a review of control orders will be incorporated into the forthcoming anti-terror Bill.
	Reports of this new terror review have focused on breaking up the Home Office and extending the 28-day pre-charge detention limit. In his latest formal statement on the issue, John Reid said:
	"Control orders continue to be an essential tool to protect the public from terrorism, particularly where it is not possible to prosecute individuals for terrorist-related activity and, in the case of foreign nationals, where they cannot be removed from the UK".
	In a speech, the Home Secretary also said that,
	"They are weak, they are hard for the police to implement, they involve massive manpower from the police and security services to try to carry out surveillance. They have got holes all through them".
	That suggests that any review would involve strengthening the control orders rather than pushing for more prosecutions in the place of orders. It would be helpful if the Minister could explain whether that is so.
	Perhaps I may make our position clear. We do not dispute that effective action against terrorism is vital. Our priority will be to extend the criminal law to enable terrorist suspects to be prosecuted in the mainstream courts. We will admit evidence from communications interception. If control orders are then still required, they will have to be granted by a judge, time-limited and subject to a high standard of proof. No one underestimates the nature of modern terrorism—it poses huge challenges to our criminal justice system—but our response should be to reform, streamline and strengthen our system to bring terror suspects before court. The powers of curfew and tags imposed behind closed doors are not a substitute for aggressive use of the full force of the law. Would-be terrorists are criminal and should be treated as such.
	We are not alone in criticising these orders. My noble friend Lord Carlile, whom the Minister quoted, raised serious concerns in his second report which was published on 16 February. He identified a number of difficulties, and I am grateful to Amnesty International for distilling what he had to say on some of these matters. His criticisms include the fact that, taken together, the obligations imposed on controllees fall,
	"not very far short of house arrest, and certainly inhibit normal life considerably".
	My noble friend has also identified the mental health implications of control orders. He has spelt out the urgent need for a strategy to end control orders, not least because some of the controllees have already been the subject of an order for a considerable time. He expresses his hope that, given the restricted nature of non-derogating orders, no derogating orders will be required. He has also identified the need for greater effort to bring about the prosecution of controllees and to examine the limitations of judicial review in control orders.
	All of that comes from my noble friend, who has access to information which is not available to many of us. The sooner that control orders are repealed and replaced by a package of new measures to prosecute suspects in court, the better it will be. Perhaps I may spell out the position that we took in the other place. Instead of holding suspects for extended periods without charge, we need to consider ways in which charges can be brought more rapidly in the first place. We should make it easier, for instance, for prosecutors to bring charges against terror suspects where evidence has not yet been fully produced but there is a good prospect that it will be. We should also re-examine the circumstances in which the police can question suspects after charge.
	We must find a way to introduce phone-tap evidence in court with protections for the security services so that agents and surveillance methods are not compromised. We should use plea-bargaining more effectively to encourage so-called super-grasses to give evidence against more serious criminals. The Government have already passed plea-bargaining legislation to tackle organised crime; why not use it to thwart terror plots, too?
	If there remains a handful of individuals who cannot be charged and for whom control order-like powers are still required, the orders must be granted by a judge and time-limited and be subject not only to a higher standard of proof but to regular and thorough assessment of the possibility of prosecution. Anything less would be a betrayal not only of our traditional British system of justice but of our duty to pursue prosecutions against criminals who plot to carry out terrorist atrocities.
	We are committed to repealing this legislation and this debate provides an opportunity to vote in favour of repeal. It would be perverse to reject this opportunity. The Government have on numerous occasions disregarded and/or extended their promise to review control orders. It was only the courts' abolition of the powers in the Anti-terrorism, Crime and Security Act 2001 that precipitated the move to this less draconian measure. Abolishing control orders would provide a similar impetus.
	Our focus is on prosecution. The Government created new criminal offences including acts preparatory to terrorism and indirect incitement to terrorism under the Prevention of Terrorism Act 2005, both of which we advocated. They are now in force and should reduce the need for control orders. The Government have an up-and-coming terror Bill in which they can address further loopholes, allow phone-tap evidence and review control orders. There is no evidencefrom the Home Office concerning where we should go from here. We should object to this order now and until the future of control orders is clarified. I beg to move.
	Moved, as an amendment to the Motion, at end to insert "but this House regrets that the Government have not replaced control orders with new measures to strengthen the ability of terror suspects to be prosecuted in court".—(Lord Dholakia.)

Lord Judd: My Lords, no one should underestimate the responsibility of government. The Joint Committee on Human Rights, of which I am a member, has re-emphasised in its latest report on the order the importance of the positive obligations on states to take effective steps to protect the public from the threat of terrorism. Protecting the public involves protecting liberty and those principles which, by being essential to the rule of law—habeas corpus, due process, the presumption of innocence and standards of proof—are the cornerstones of liberty. To erode them ourselves is to score a goal for the extremists, who seek their destruction. We must therefore be very careful.
	Like the Joint Committee on Human Rights as a whole, I find it particularly significant that the Director of Public Prosecutions, with all his authority and experience, in a recent lecture to the Criminal Bar Association argued firmly that we should hold it as an article of faith that crimes of terrorism are dealt with by criminal justice and that, in the wake of 9/11, some of the values enshrined in both the European convention and the common law appear to be losing their status so that some people now seem to think that such fundamental rights as the right to a fair trial and the right to liberty can be compromised, even when the life of the nation may not be entirely at stake. One of the worst manifestations of this approach, he suggested, has been the resort to parallel jurisdictions, where standard protections, quite deliberately, are no longer available and suspects are removed from the protections of criminal justice and placed instead in quasi-judicial or even non-judicial fora deliberately hostile to due process.
	The Joint Committee found itself very much in line with the DPP's assessment. The committee has underlined that, in its view, the Government should now urgently address the obstacles to prosecuting for terrorism offences, adapting ordinary criminal procedures where necessary but always preserving the suspect's right to judicial review of detention and to a fair trial before a court which is truly judicial.
	The issue of intercept material is highly relevant to all this. It is obvious that intercept material is frequently critically relevant to the action that is taken. As I understand it, the noble Lord, Lord Carlile, holds that, although the law might be amended to make use of telephone intercept in criminal trials, the availability of such evidence would be rare and possibly of limited use. By contrast, the DPP, in the lecture to which I have already referred, stressed not only that we need to find ways to remove the bar on admissibility of intercept evidence but that that would overcome one of the main obstacles to prosecuting terrorist suspects. Surely the reflections of the chief prosecutor cannot be taken lightly.
	The noble and learned Lord, Lord Lloyd of Berwick, is to return to this issue with his new Bill on Friday next week. As a keen supporter of his position, I am frustrated to find that I shall that day be taking evidence for a current Joint Committee on Human Rights inquiry away from London. I genuinely wish him well.
	These issues and others drive home that the order before us goes to the kernel of what is at the centre of the Britishness that so concerns the Government. The order deals with grave and far-reaching matters, as my noble friend herself emphasised. Proper consideration is therefore imperative. We must never too easily lend ourselves to what may prove to be a fundamental change in the nature of British law. The most careful deliberation of what is being proposed and its implications is imperative.
	In its report on the first renewal of the control order regime, the Joint Committee was very critical of the lack of opportunity for meaningful parliamentary scrutiny of such orders, especially as, at the time of the passage of the 2005 Act, the Government had indicated that there would be further opportunity to debate amendments to the control order regime in the light of its operation. The committee regretted that the Home Secretary had decided to exercise his power to renew the Prevention of Terrorism Act rather than bring forward a Bill. This inevitably constrained the opportunity for meaningful parliamentary scrutiny of the regime and gave no opportunity to amend the legislation. One of the reasons given by the Home Secretary for not bringing forward a Bill was that he was waiting for the report of the noble Lord, Lord Carlile, on the definition of terrorism. A year later that report has still not been published by the Government, which I find disturbing.
	In his response to last year's Joint Committee on Human Rights report the Home Secretary recognised that in the debates on the 2005 Act a commitment was made to Parliament that there would be a further opportunity to debate the control order regime and to amend the legislation. Indeed, he indicated that the Government intended to bring forward a terrorism consolidation Bill in 2007, which would create an opportunity to amend the control order's provisions. From the comments made by the Minister during the recent renewal debate in the Commons, it seems that such a Bill cannot now be guaranteed to appear before the 2008 renewal of the order. I hope that my noble friend in replying to this debate can assure us that that is not the case.
	Last year, the report of the noble Lord, Lord Carlile, on the operation of the Prevention of Terrorism Act and the renewal order were both laid on 2 February. The renewal debate took place in the House on 15 February. The Joint Committee, among others, pointed out that that gave only limited time for proper scrutiny, which should seriously take into account the noble Lord's observations. This year the order was laid on 1 February, but the noble Lord's report on the operation of the regime was not laid until 19 February—only three days before the renewal debate in the Commons. Surely my noble friend would agree that this is going from bad to worse. How can that be reconciled with proper scrutiny on such grave matters?
	Paragraphs 21 to 29 of the Joint Committee report on the renewal order deal with the deprivation of liberty. They describe the nature of existence under a control order, and draw heavily on the measured conclusions of Justice Sullivan in the High Court in the case of JJ v Secretary of State for the Home Department. In that judgment he described the situation under the control orders as "the antithesis of liberty", and said that,
	"these control orders go far beyond the restrictions in those cases where the European Court of Human Rights has concluded that there has been a restriction upon but not a deprivation of liberty".
	He quashed the orders in question on the grounds that they were in effect derogating control orders, which the Home Secretary has no power to make. The Court of Appeal upheld that ruling.
	As the Joint Committee reports, seven of19 control orders made or renewed this year have been quashed on the grounds that they were so restrictive of liberty as to amount to a deprivation of liberty. This means that while purporting to be non-derogating control orders, they were in fact derogating orders, which there is no power to make in the absence of a derogation from Article 5 of the European convention. A derogating control order can be made only by a court, and only then following a derogation from Article 5 by Parliament. What does my noble friend say to the observations by the Joint Committee that while it must be recognised that the litigation concerning the compatibility of current control orders with Article 5 has yet to run its course, Parliament is being asked to renew a power, which not just the Joint Committee but the High Court and the Court of Appeal have said is being routinely exercised in breach of the most fundamental of all human rights—the right to liberty, as expressed in Article 5 of the European convention.
	Also, what does my noble friend say to the committee's observation that if the European Court of Human Rights eventually decides that the control orders that have been challenged are unlawful in the absence of derogation, the Government will effectively have been operating a de facto derogation from Article 5, and that Parliament is being asked to be complicit in such a de facto derogation without the opportunity, with all that it now knows about how the power is being used, to debate whether such a derogation is justified?
	On due process, the Joint Committee realises that, in the case of the Secretary of State for the Home Department v MB, the Court of Appeal has declined to endorse the finding of Mr Justice Sullivan in the High Court, and has upheld the compatibility of the control order regime with the right to fair hearing in Article 6(1) of the European Convention. It goes without saying that the Joint Committee takes the conclusions of the Court of Appeal most seriously. However, after careful deliberation, in all integrity, it remains doubtful whether the procedures for judicial supervision of control orders in the Prevention of Terrorism Act in fact secure the substantial measure of procedural justice claimed for them. In this, we are apparently once more in line with the Director of Public Prosecutions, when he puts it that the abandonment of fair trial protections in the face of terrorism amounts to an abject surrender to nihilism, and that our criminal justice response to terrorism must be proportionate and grounded in due process of the rule of law. He argues that this means that, in fighting terrorism, we should not make exceptions to the rule of law, but use its inherent strength in our activities.
	As the Joint Committee reminds us, certain fundamental principles of the rule of law are non-negotiable. They represent the essence of fairness. Trials should be routinely open and reported before independent and impartial judges. There is no place for secret courts and secret justice. Equality of arms and the right to call and examine witnesses under equal conditions are essential. Defendants are entitled to know the case against them, and must have full access to the state's case against them. The presumption of innocence and the criminal standard of proof beyond reasonable doubt are fundamental. What is my noble friend's response to the Joint Committee's position that these due process standards should apply to more restrictive derogating control orders because of the severity of the restrictions they contain?
	We must all understand the Government's dilemma as they face the real threat of international terrorism. What should we do about individuals who pose a serious threat but cannot be deported, or whose prosecution presents security difficulties? The Joint Committee has concluded that the only human rights-compatible course is to persevere in finding ways of bringing a proper prosecution.
	I could say more about the Joint Committee's findings. I hope that noble Lords will read that report very carefully. I conclude with a personal observation in which I fervently believe. I am totally convinced that the breeding of terrorism will be contained by transparent justice in all its manifestations. I am equally convinced that, by ever allowing ourselves to be deflected from such transparent justice, we are in danger of feeding the breeding grounds of recruits for terrorists.

Lord Lloyd of Berwick: My Lords, I am glad to follow the noble Lord, Lord Judd, because he has said much that I would have wanted to say, and so well, that I can be quite brief.
	When the Act was going through the House in those fraught days at the beginning of 2005—which I think none of us will ever forget—many of your Lordships had some sympathy with the then Home Secretary, Mr Charles Clarke. Part 4 of the 2001 Act was about to expire. The suspects detained at Belmarsh for four years without trial would then have to be released. The decision of the House of Lords in A's case, quashing the derogation on the basis of which Part 4 of the 2001 Act rested, was given only on 16 December 2004. So the Home Secretary did not have long to think what to do; he had nothing whatever to put in its place.
	I had less sympathy than some of your Lordships with the plight of the Home Secretary, because it seemed to me that the Home Office must have anticipated at least the possibility that the decision by the Court of Appeal in A's case would be reversed by the House of Lords. If they did anticipate that possibility, they did nothing about it except hope for the best. In the event, the 2005 Act which now comes up for renewal was pushed through the House of Commons without them having the proper opportunity to consider it or to consider the crucial part of the Bill, because it only finally took shape when it got to this House. We let it through after those days which we shall not forget on the promise—as I understood it—or undertaking that we would have another opportunity of considering control orders early in the next Session.
	We are still waiting. Instead, we spent much time on the 2006 Act, with the new offences of glorification of terrorism and the long argument about whether detention should be for 28 or for 90 days. But we have not had another opportunity to consider what we were promised—control orders. Here we are now, up against yet another deadline, just as we were two years ago. No doubt we will be given promises again by the Government in the way we were then.
	Some of us opposed control orders from the very start. It seemed to us that non-derogating control orders could easily be subject to abuse, despite the supervising powers of the judge under Section 3. It also seemed to us wrong in principle to use civil courts for imposing criminal sanctions in terrorist cases. The only precedent for that was ASBOs and one only has to think of it to see how far removed ASBOs are from the sorts of control orders with which we are concerned.
	What has happened? Have control orders been abused? Yes, they have. The standard form of control order devised by the Home Office came beforeMr Justice Sullivan in exactly the way described by the noble Lord, Lord Judd, in a test case. In his view, the restrictions on liberty were such as to amount to a deprivation of liberty contrary to Article 5 of the convention. He did not even regard it as a borderline case. He said it was obvious and his decision was upheld in the Court of Appeal. So the Belmarsh detainees have twice had their case upheld by the courts, on the grounds that what they were undergoing was contrary to the Human Rights Act. One can imagine what effect that would have on the communities from which they came.
	What about using the civil courts for imposing criminal sanctions? It is said, "Oh no, this isn't a criminal sanction at all—this is merely a preventive order". But that was not how it seemed to Mr Justice Sullivan and it is not how it has seemed to quite a number of those subject to them, who apparently said that they would almost have preferred to have been back in Belmarsh.
	One would have thought that in relation to using this civil process, the Government might have learnt something from the past, but they have not. They have continued down the same primrose path. We now have before us the Serious Crime Bill, which uses exactly the same defective process—no longer in relation to terrorism but in relation to serious crime, and not even crime that is serious—in some cases it is not even crime at all, just people who are thought to be or suspected of being on the fringes of serious crime. It has been universally condemned by Liberty, Justice and, above all, in very measured words by the Select Committee on the Constitution. I shall read part of the last paragraph of its report:
	"A broad question for the House is whether the use of civil orders in an attempt to prevent serious criminal activity is a step too far in the development of preventative orders. Whether or not the trend towards greater use of preventative civil orders is constitutionally legitimate (a matter on which we express doubt), we take the view that SCPOs represent an incursion into the liberty of the subject and constitute a form of punishment that cannot be justified in the absence of a criminal conviction".
	Every word of that applies equally to the control orders that we are being asked to renew today.
	I entirely share the regret of the noble Lord, Lord Dholakia, that this order is being brought before us, and I shall support his amendment.

Lord Slynn of Hadley: My Lords, I fully agree with the final point made by the noble Lord, Lord Judd, about the importance of due process and of observing the requirements of natural justice in all activities of the kind with which the House is now concerned. The Government have recently had a very clear warning, which should be borne in mind in support of what the noble Lord, Lord Judd, has said. The Court of First Instance of the European Communities has just roundly condemned the Council of the European Union for having put someone on a proscribed list without giving them a proper chance to reply or providing the necessary evidence, and in breach of other rules of natural justice. The United Kingdom Government was the only member state to appear before the Court of First Instance and to support the Council. Because of the line of argument adopted by the Government inthat case, they must therefore share to some extent the bloody nose given to the Council. Considering the matters before the House today, and particularlythe speech of the noble Lord, Lord Judd, I hopethat the Government will not court another bloody nose.

Lord Goodhart: My Lords, like the noble and learned Lord, Lord Lloyd of Berwick, and, no doubt, a large number of other noble Lords, I remember all too vividly the final debate in your Lordships' House on the Prevention of Terrorism Bill, which started at 11.30 am on 10 March 2005 and ended at 7.30 pm on 11 March. It was the longest debate in the history of your Lordships' House.
	During that debate, we pressed, as we had at earlier stages of the Bill, for three things in particular: first, that there should be an irremovable sunset clause on the power to make control orders; secondly, that all control orders ought to be made by judges; and, thirdly, that the standard of proof for the making of control orders should be at least the balance of probabilities. On the sunset clause, a compromise was reached which we, with the Conservatives, accepted. The Government did not agree to the inclusion of a sunset clause, but they gave a very clear undertaking to introduce a new Bill on terrorism in a form which would make it possible to debate and to amend control order legislation and other provisions of existing legislation on terrorism.
	There was a proposed timetable by the Government that there should be a draft Bill and pre-legislative scrutiny in the autumn of 2005 and that a new Bill should be published in March 2006 which was expected to receive Royal Assent in about July 2006. That was clearly expressed in the speech of the noble and learned Lord the Lord Chancellor—Hansard, 10 March at cols. 1058-59. During the final stage of that debate, speaking from the Front Bench, I said in response to the Lord Chancellor that,
	"if the Government renege on the undertakings or are guilty of unacceptable delay in implementing them, we would regard that as a justification for departing from the usual convention of your Lordships' House that we do not reject secondary legislation".—[Official Report, 10/3/05; col. 1060.]
	The Government timetable for that undertaking was understandably derailed by the London bombings four months later. The Bill, which became the Terrorism Act 2006, was not the right place for a careful reconsideration of control orders and other provisions of earlier Acts, and did not receive any reconsideration. But the events of July 2005 did not discharge the Government from complying with their undertaking at a later date.
	I accept that because of the commitment of some terrorist groups to mass murder, it may be necessary to impose restrictions on the behaviour of those who are probably involved in the planning or preparation of terrorist acts, even if the evidence falls short of proof beyond reasonable doubt. I accept, too, that there may be a few cases where evidence exists which cannot be used, in particular because of the threat to the provider of that evidence. With reluctance, therefore, I agree with the views of my noble friend Lord Carlile of Berriew and would not seek to reject control orders altogether. But control orders can be and are being used to impose severe restrictions on defendants. The table on page 5 of my noble friend Lord Carlile's most recent report shows this plainly, as do the decisions in the two recent cases known by the initials JJ and E. I recognise, of course, that those cases will be going to the Appellate Committee of your Lordships' House. I therefore agree with the Joint Committee on Human Rights that if the Government really believe that control orders of this severity are necessary, they should be prepared to derogate from Article 5 and justify that derogation in Parliament and in the courts. One effect of derogation under the Prevention of Terrorism Act would be that control orders would have to be made by the courts on the basis of the balance of probabilities, whichwe have asked for all along and which we believe should apply to non-derogating as well as derogating orders.
	I believe, as I did two years ago, that it is absolutely wrong for the Home Secretary to have the power to impose severe restrictions by executive order, even if that order is subject to judicial review. I also believe that if evidence fails to show that on the balance of probabilities a defendant is involved in terrorism, the defendant should not be subject to a control order. If it is no more than a matter of suspicion, that may be a ground for continued surveillance, but not for a control order. To say that grounds for suspicion are enough for control orders will mean—and frankly this is beyond reasonable doubt—that innocent people will be subjected to control orders, with all the consequences that bodes for alienation of the communities from which they come.
	In February 2006, when these sections were last renewed, the Home Secretary refused to say that he would introduce any new legislation. That was clearly in breach of the undertaking given by the Lord Chancellor. There is no reason why we could not have had a new terrorism Bill in the present Session. This time the Government have not been quite so blatant about it, but they plainly have not committed themselves to fulfilling the undertaking given two years ago. I need refer only to the speech made in the debate on the order in the House of Commons on22 February by the Minister, Tony McNulty, who said:
	"I cannot give an absolute assurance that within a year we will be looking at revised legislation, rather than a renewal ... There may be an additional counter-terrorism Bill, as indicated in the Queen's Speech, before the next renewal is due".[Official Report, Commons, 22/2/07; col. 455.]
	That is not an adequate reason for refusing to comply with the undertaking for yet another year. There is no reason why in the same Bill we cannot bothrevise existing legislation and introduce new provisions such as the removal of the ban on intercept evidence. The fact is that the Government are reneging on the undertaking given on 10 March 2005 which was central to the compromise that enabledthe Prevention of Terrorism Bill to go through that day.
	My noble friend Lord Dholakia has, for reasons that I fully understand and agree with, put down a non-fatal amendment rather than calling for the rejection of this order. However, the Government have reneged on an undertaking, and they must not be allowed to continue to get away with it.

Lord Dear: My Lords, counter-terrorism is important—in fact, it is one of the most important things that this House can consider in the current climate—and it requires a whole battery of powers to address and combat it. Many of those responses, given the fast-moving threat that terrorism poses, have to be novel. Indeed, I support what the noble and learned Lord, Lord Lloyd of Berwick, said earlier about the interception of communications, and I shall be an enthusiastic supporter of that Bill when it is debated here on Friday week.
	I want to be brief, and to make a general point in order to make a more particular one. When I was an undergraduate reading law at university in the 1960s, I remember that every self-respecting student had on their wall a poster of Che Guevara, and they at least knew something of the writings of Marcuse. Both of those terrorist luminaries said many times that the best course for an urban terrorist was to so provoke a Government or a civil power to overreact to a threat by eroding civil liberties, increasing executive powers and diminishing due process by the denial of natural justice—that is, to increase the ratchet effect. Anyone who knows anything about the laws of physics knows that whereas it is easy to go up on the ratchet, it is well nigh impossible to come down. That allows the urban terrorist then to point to those actions and cite them as proof that the Government or civil power in question are corrupt, and therefore they can justify the acts of terrorism against them.
	I am not for one moment suggesting that this Government are corrupt, but I believe we are dangerously close to being seen to be repressive. My point is that that is not the way to win the battle of hearts and minds, particularly in the minority groups in this country, which is the only way in the long term that we shall counter and remove the threat of terrorism. It is for that reason and for that reason alone that I support the amendment that has been proposed today.

Lord Kingsland: My Lords, we of course recognise the gravity of the terrorist threat and share the Government's concern about it.
	We also accept that, in circumstances in which it is impossible to prosecute or deport someone, some form of control order system will be necessary. That is why we have some hesitations about the wording of the amendment proposed by the noble Lord, Lord Dholakia, which seems to suggest that control orders can be replaced wholly by a system of prosecution. Nevertheless, we share entirely the spirit that lies behind it.
	Control orders are, essentially, instruments of executive power. They therefore pose dangers to a society based on the principles of democracy and the rule of law. Terrorism menaces those values as well; but responding to terrorism with legislation that is itself capable of undermining those values can, if it is not limited to what is absolutely essential and subject to regular review, achieve precisely the objects that the terrorists seek. That is the point made so well by the noble Lord, Lord Dear, when he drew your Lordships' attention to the philosophy of Che Guevara.
	The noble and learned Lord, Lord Lloyd of Berwick, and many other noble Lords, reminded us of the events of early March 2005, when the Prevention of Terrorism Bill was being considered. Noble Lords who were involved will recall that this House was at loggerheads with another place on four or five issues, the most important of which was the sunset clause. In the end the deadlock was broken by the right honourable gentleman the then Home Secretary, who, as the noble Lord, Lord Goodhart, rightly reminded us, undertook to introduce legislation the following year which would give us ample opportunity to amend Sections 1 to 9 of the Prevention of Terrorism Act.
	As the noble Lord, Lord Goodhart, also reminded us, this undertaking in another place was confirmed by the noble and learned Lord the Lord Chancellor, who said:
	"The new counter-terrorism Bill will be introduced into the Commons in spring 2006, and the renewal of this Bill's life will be in March 2006. Until approximately July 2006, we will have the passage of the new counter-terrorism Bill through Parliament, with Royal Assent—approximately—in July 2006. That will allow the process of reviewing this Bill and the passage of a vehicle in which any amendments can be made to go on at the same time".—[Official Report, 10/3/05; col. 1059.]
	Nothing could be less equivocal than that statement.
	As the noble Lord, Lord Goodhart, also reminded your Lordships, some months later the tragedy of the July Underground killings occurred and a new Terrorism Bill was introduced, which was inappropriate—as he accepted—as a vehicle for serious consideration of the control order regime under the Prevention of Terrorism Act. We accept that. However, the right honourable gentleman the then Home Secretary gave an additional reason in another place for delaying the measure. I apologise to your Lordships for quoting his observations. He said that,
	"there are three very important pieces of work that are being done this year, which I want to be able to take into account before presenting legislation on counter-terrorism. The first is Lord Carlile's review of the legislative definition of terrorism, which was promised during the passage of the Terrorism Bill and has been a significant part of the debate in both Houses of Parliament. The second is his report on the operation of the current Terrorism Bill, once passed, and in particular the measure to lengthen the period of detention without charge to 28 days, which has been the subject of great debate in both Houses. The third is the work that the Government are undertaking to find, if possible, a legal model that would provide the necessary safeguards to allow intercept material to be used as evidence ... Each of those pieces of work has been of considerable importance to Members in all parts of this House during our debates, and in my view will demand attention before we decide the details of how to proceed on terrorism legislation".—[Official Report, Commons, 2/2/06; col. 479.]
	Here we find the then Home Secretary introducing entirely fresh considerations into the obligation that he unequivocally undertook a year earlier to bring legislation before your Lordships' House in 2006. I should add, incidentally, that neither the honourable gentleman Mr McNulty nor the noble Baroness has said anything about the progress of these matters.
	As your Lordships have said, there is absolutely no sign whatever of any progress on a terrorism Bill in 2007 which would give your Lordships the opportunity to table amendments to Sections 1 to 9 of the Prevention of Terrorism Act. This would not be quite as serious were it not for the fact that the operation of the Bill since it came on to the statute book has demonstrated so many manifest inadequacies, inadequacies which your Lordships have discussed amply and most cogently this afternoon.
	I would like to emphasise two of them. The first concerns the issue of prosecution. In the 2005 debates we sought, with the support of the Liberal Democrats, to require the Director of Public Prosecutions to give an undertaking that prosecution was simply not possible before the control order regime was triggered. The Government resisted that, preferring instead that the chief police officer in the area where the control order was to be imposed would make a statement that, in all the circumstances, prosecution was not feasible.
	Now, the report of the noble Lord, Lord Carlile, among other sources of evidence, makes it quite clear that that system is not working. At paragraph 57 of his report, he says that,
	"I have seen letters from chief officers of police in relation to each controlee certifying that there was no realistic prospect of prosecution. Little is given by way of reasons ... I should ... like to see more detail in those letters—for example, and if necessary in a closed version, an explanation of the sensitivity of material that could not be placed before a court of trial. If there is a thorough and continuing examination of whether a prosecution could be brought, the evidence of that examination remains unconvincing in some cases ... In my view the decision whether to prosecute should be taken following detailed and documented consultation in every case between the Crown Prosecution Service ... the police, the Security Service and the Home Office, on the basis of full consideration of the evidence and intelligence".
	Moreover, as many of your Lordships have indicated, there was a judgment as recently as 16 February byMr Justice Beatson in the case of E v the Home Officeunderlining the concerns that the noble Lord, Lord Carlile, has expressed. One basis for his quashing of a control order was that the Home Secretary had failed to keep the prospects of prosecuting E under review. Mr Justice Beatson went on, at paragraph 292 of his judgment, to say that,
	"a process which simply relied on the chief officer of the Police force or the Police officer present at the relevant meeting of CORG—
	I pause there to explain that that is a three-monthly meeting of police officers to consider the control orders that have been made,
	"to bring matters forward is insufficient".
	So, from both an independent reviewer and a judge we find the inadequacy that we in this House perceived, before the Bill was passed, emphasised in its operation.
	Your Lordships will be wholly familiar with the other points that I would make about prosecution. We simply do not understand why the Government are not able to allow intercept evidence in criminal trials. After all, they use bugging evidence and intercept evidence from other regimes. Apart from Ireland, I am unaware of any country that refuses to use intercept evidence. The Attorney-General, speaking in the United States, is on record as saying that it is desirable to use intercept evidence, the Director of Public Prosecutions has added his name to that, and the Home Secretary said last year in another place that the Home Office is actively considering this matter. What more does the Home Office want? Why is this matter being delayed? Allowing intercept evidence to be used could solve nearly all the problems that we have with control orders.
	The other matter to which I wish to draw your Lordships' attention is the question of Section 3(10), which has, again, been extremely well canvassed this afternoon. That section permits review by the High Court of non-derogating orders. We, with the full support of the Liberal party—the noble Lord, Lord Goodhart, spoke with great eloquence on this issue—believed that a system of review was inadequate and that, as in the case of Section 4 on the derogating orders, there should be full consideration by the High Court on merits.
	Along comes the case to which the noble Baroness herself, and many other noble Lords, referred—the Secretary of State for the Home Department v MB and Others. Your Lordships will recall that Mr Justice Sullivan quashed five control orders on the grounds that they breached Article 5 of the convention. Those orders should have been imposed, if at all, under Section 4 of the Prevention of Terrorism Act. Mr Justice Sullivan was in no doubt whatever that the control orders breached Article 5, and that was wholly confirmed by the Court of Appeal on appeal by the Home Office. Both courts were clear that it was not just a marginal case; it was absolutely clear-cut that those control orders were in breach.
	But there was another issue—whether thereview provision in Section 3(10) was compatible with Article 6 of the convention on human rights. Mr Justice Sullivan had found a clear case of incompatibility. The Court of Appeal was much more nuanced in its approach; it said that, by applying Section 3 of the Human Rights Act 1998, it was possible to interpret Section 3(10) of the Prevention of Terrorism Act so that it conformed with Article 6, provided that that interpretation gave ample grounds to the court to consider the control orders.
	That was very well illustrated by the noble and learned Lord the Lord Chief Justice. In paragraph 58 of his judgment, he said that,
	"when reviewing a decision by the Secretary of State to make a control order, the court must make up its own mind as to whether there are reasonable grounds for the necessary suspicion".
	In paragraph 60, he continued:
	"Whether there are reasonable grounds for suspicion is an objective question of fact. We cannot see how the court can review the decision of the Secretary of State without itself deciding whether the facts relied upon by the Secretary of State amount to reasonable grounds for suspecting that the subject of the control order is or has been involved in terrorism-related activity".
	He then stated in paragraph 63:
	"Whether it is necessary to impose any particular obligation on an individual in order to protect the public from the risk of terrorism involves the customary test of proportionality".
	In paragraph 64 he stated:
	"The Secretary of State is better placed than the court to decide the measures that are necessary to protect the public against the activities of the terrorist suspect and, for this reason, a degree of deference must be paid to the decisions taken by the Secretary of State".
	Finally, in paragraph 65 he said:
	"Notwithstanding such deference there will be scope for the court to give intense scrutiny to the necessity for each of the obligations imposed on an individual under a control order, and it must do so. The exercise has something in common with the familiar one of fixing conditions of bail. Some obligations may be particularly onerous or intrusive and, in such cases, thecourt should explore alternative means of achieving the same result".
	Noble Lords will forgive me if I misunderstood, but I had the impression that the noble Baroness sought to convey to your Lordships that reversing the decision of Mr Justice Sullivan that Section 3(10) of the Prevention of Terrorism Act was incompatible with Article 6 of the Human Rights Act was in some way a victory for the Government. In the light of what the noble and learned Lord the Lord Chief Justice said, that is plainly not true. In the proceedings in the Court of Appeal, counsel for the Home Office opposed this approach to Section 3(10) and, indeed, is appealing against it to the House of Lords. So I regard the decision by the Court of Appeal as entirely vindicating the approach that your Lordships took to these matters in March 2005; and, mercifully, it will lift some of the burden off our shoulders when this legislation finally returns to us for consideration.
	The history of these measures since March 2005 provides ample evidence of the absolute necessity for Parliament to be in a position to review the 2005 Act as soon as possible. I wholly agreed with the noble Lord, Lord Goodhart, when he said that he regarded the constitutional convention about Orders in Council not to apply in the circumstances of this woeful story. Although no amendment has been tabled seeking to render the order nugatory, the Government should be in no doubt that next time there will be no circumstances in which we will be prepared to renew this order.

Baroness Scotland of Asthal: My Lords, I thank all noble Lords who have contributed so powerfully to the debate. The noble and learned Lord, Lord Slynn, asked whether the Government would need to have another bloody nose before we looked at this matter again. As the recipient of a number of your Lordships' blows and this being domestic violence month, I am very conscious that there is a need to reassure the House about the necessity for these control orders. I remind the House that, if this order is not renewed, they will lapse on 10 March this year. From all the comments that have been made, it is clear that that is not the House's intention. Therefore, I commend the approach taken by the noble Lord, Lord Dholakia, in tabling a non-fatal amendment to it, as it has enabled us to have a very wide-ranging and purposeful debate.
	I agree entirely with what has been said, particularly by the noble Lord, Lord Dear, about the need to be proportionate and to ensure that our system is not undermined. It is right that those factors are very much borne in mind. Indeed, throughout all our deliberations on how we should respond to terrorism, the response of this House has been that we should be judicious and careful so that we do not give adventitious advantage to terrorists, who seek to undermine our democratic process. It is a question of balance and judgment. I think that all Members of the House would agree that there is a line between a derogating order and a non-derogating order. Often it is a question of fact and degree as to whether an order falls on one side of the line or another. A number of orders have been made, maintained and sustained, when there has been no suggestion that they are in the zone of a derogating order.
	I need to reiterate what I said at the beginning. There is an absolute commitment and need to prosecute if and whenever possible. That is the preferred choice. I hear what my noble friend Lord Plant said about there being almost a paucity of such orders, and that they have been rarely used. The reason why there have been so few orders is because their use is carefully monitored and judicious; they are used only when absolutely necessary. I remind the House of what the independent reviewer, the noble Lord, Lord Carlile, said. I accept, as the noble Lord, Lord Lester, made clear, that the noble Lord did not review the question in relation to the JCHR. He said in relation to each control order that he agreed with the judgment made by my right honourable friend the Home Secretary that in those circumstances, and for those individuals, the control order regime was necessary and appropriate. It is important for us to use these orders, but to do so judiciously, as noble Lords have said.
	I thank the noble Lord, Lord Kingsland, for the clarity with which he accepted that there are and were circumstances where some form of control order is necessary, and that it is essential to subject such orders to review. I agree with him. We need to remember too, the circumstances in which we found ourselves in 2005. I am grateful to the noble Lord, Lord Goodhart, and others who reminded us of that chronology. I hope, therefore, that the House will not mind me reminding it about the scepticism expressed at that time about the likelihood that we would be subject to a terrorist attack. Some in this House even went as far as to assert that the Government were simply trying to frighten the public by making such a suggestion, and that it was almost spurious. We know that that was not the case. There have been serious threats, which our security services and our police have worked tirelessly and successfully in the past few years to prevent coming to fruition. All sides of the House commend them for their energy.
	I know that repeatedly we have had the issue of intercept, which we will come back to and be asked about again. The Government have made it clear that there is no objection to the use of intercept in principle if it can be used safely and appropriately. I do not demur from anything that has been said by the noble and learned Lord, Lord Lloyd different legal and other officers who have raised the utility. Each has said, "if it can be safely used". That has always been the caveat and something that the Government continue to look at vigorously and carefully.
	However, it is right to say that intercept evidence is not a panacea. Therefore, even if we were able to use it, which is not admitted, it is likely that there would still be cases that would fall outwith the realm of prosecution. We would still have to look at what regime we need to put in place to deal with those few but important cases. It is for that reason that we have changed many things. I accept and acknowledge the comments made by noble Lords about the introduction of the Prevention of Terrorism Act. We have not stood still but have changed things and brought in new legislation. We have demonstrated this with the new offences introduced by the Terrorism Act 2006 which have already been used in prosecutions, with around 20 individuals charged under such offences by the end of December 2006. Of our four legislative proposals raised during the debate in the other place, two are already in place—the threshold test and the plea bargaining for supergrasses—and the other two—the intercept as evidence and post-charge questioning—are under active consideration.
	Even with all the changes already made or proposed, however, a small number of cases will remain where prosecution is just not possible, as I said earlier. Control orders remain the best option. I thank the noble Lord, Lord Lester, from bringing the developments with the Supreme Court judgment in Canada on Friday of last week to my attention. I reassure him that I was in Canada talking about this very issue with my Canadian counterparts last week, and about how we move forward. We will look with great care at what the Supreme Court says in that decision.

Baroness Scotland of Asthal: My Lords, I beg the noble Lord's pardon. He will know that a decision was also made in the Supreme Court on Friday. Whether the special advocate should have additional issues is a matter of some interest. Of course we will look at that and take it into consideration. It is perhaps important to acknowledge that there is an implicit acceptance that the special advocate procedure might have a certain degree of utility and support.
	I of course hear the issue of how prosecution is addressed, and confess disappointment at the lack of belief that the Government are energetically pursuing it. I assure your Lordships that it is by far the easier course if the evidence is there to prosecute. We have an independent Crown Prosecution Service andpolice who are undertaking that. One must of course take their advice into account and, in effect, be bound by it. The Government, as noble Lords will know,do not prosecute matters themselves. Post-charge questioning has also been raised. We are looking at it, as we are looking at a number of other issues.
	The noble Lord, Lord Lester, says that, notwithstanding the JCHR report only having been lodged yesterday, I should make a full exposition of the Government's position today. I know that the noble Lord seeks to lure me into it, but I am obliged to resist that temptation, although I am certainly more than happy to give an outline of where we are. The noble Lord will know that, by the normal processes, we have a little time to consider and digest what has been said, and show the committee the respect that their report deserves before responding. On other occasions, the Government have been severely criticised—I am trying to remember whether that was by the noble Lord—for precipitously responding to a report without giving it mature and considered reflection.

Baroness Scotland of Asthal: My Lords I said that I would give an outline, but would not give the details so I hope that I will be able to satisfy the noble Lord. If I cannot satisfy him, I apologise in advance and of course the full reply will be forthcoming in due course. Before I turn to the JCHR, I will deal with matters in chronological order. The noble Lords, Lord Goodhart and Lord Lester, and others asked about the delay in publication of the definition of terrorism and the report. Your Lordships will know that the noble Lord, Lord Carlile, received the report at the Home Office on 7 January. There has been a need to consult with other departments on the contents of the report and we intend to publish the report and the Government's response in the near future. We hope that in so doing we will be able to canvass a number of the issues, as part of the wider review of counter-terrorism capabilities and resources.

Baroness Scotland of Asthal: My Lords I have no idea. All I can tell your Lordships is that we have the report. It is being actively considered and consulted upon now. I know that those who participatein Chatham House discussions are all absolutely trustworthy and would never breach the confidence which has been placed in them. So of course I can say nothing about that.
	As part of the wider counter-terrorism review, we are looking at the capabilities and resources. We have been looking to see if there are any changes needed to our existing legislation. We have identified some areas that need strengthening and will bring forward legislation to address those in the future. Since the former Home Secretary announced the intention to bring forward a further counter-terrorism Bill this year, we have conducted a fundamental review of our counter-terrorism capabilities and resources and are looking at all the issues in order to ensure we have the tools necessary to combat matters with a greater degree of utility.
	The Government do not accept the thrust of the JCHR report, which is that the control order system is not necessary because not enough has been done to strengthen the ability to prosecute terrorists and terrorist suspects. As I have already made plain, prosecution remains the Government's first choice. Since the Home Secretary announced his intention to bring forward a further counter-terrorism Bill this year, we have considered the issues in relation to intercept, to post-charge, and what other changes there will need to be. All those issues are under consideration.
	The Government do not accept that the current control orders are in breach of Article 5 of the ECHR and therefore we do not agree that derogation is necessary. However, as I said at the beginning of the debate, each order will be specific to the suspect concerned and they are individually tailored. So there will be cases where the control order will have very few conditions and there will be others where there are more. Getting that line between what is acceptable and non-acceptable is always an issue of judgment, fact and degree. As a regime, the Government do not accept that control orders per se are in breach of Article 5 or Article 6. In relation to due process—due process concerns were raised by JCHR—the Government do not accept that they apply. We remain of the view that control orders are ECHR compatible. The noble Lord, Lord Kingsland, and a number of other noble Lords talked aboutthe judgment made by Mr Justice Beatson that was upheld in the Court of Appeal. Those issues will be actively debated before the judicial committee of this House.
	The suggestion of the noble Lord, Lord Carlile, about continued investigation is being looked at. The judgment in Re. E enables us to look at the issue of prosecution. For the purposes of completeness, I should say that I heard what the noble Lord, Lord Kingsland, said in relation to the judgment in E. One of the issues before the court was whether there had been a proper investigation of whether prosecution was proper. It was the opinion of the police that there remained no prospect of prosecuting E for a terrorist-related crime. In the light of the court's ruling about the possible relevance of the Belgian court's judgment in relation to this individual, the Home Office asked the police and the Crown Prosecution Service to review the position again, including those judgments, to consider whether there were grounds for prosecuting E for a terrorism-related offence. The Crown Prosecution Service has now reviewed the material and has confirmed that there is insufficient admissible evidence to prosecute E for a terrorist-related offence. That is the position.
	The Government's comment on absconders is that we have the difficulty that if the conditions placed on individuals do not wholly control their ability to leave the jurisdiction or leave their homes one has to accept that some will do just that. There is a dilemma between imposing restrictions that will so restrict the liberty of the individual that they are inconsistent with ECHR and imposing restrictions that will mean that one can appropriately monitor where individuals are, what they do and where they go. If we have a system that does not rigidly control every moment of their day, one has to accept that the natural consequence is that some will abscond and cause difficulty. That is the balance.
	We have had a robust and insightful debate, but I invite the House to say that this order should be renewed. The noble Lord, Lord Dholakia, having had his day, can be content with that, and we can come back to these issues on another day.

Lord McKenzie of Luton: My Lords, with the permission of the House, I wish to repeat a Statement made by my right honourable friend the Secretary of State for Work and Pensions in another place. The Statement is as follows:
	"In December, I commissioned David Freud to conduct a review of progress on welfare reform, to analyse the future challenges we face and to make recommendations. David Freud has published his report today. Copies are available for Members at the Vote Office and on my department's website."The report is a substantial contribution to the debate and I should like to put on record on behalf of the Government, and I hope the whole House, my thanks to David Freud for his work. Freud has concluded that we have made strong progress in welfare reform over the past 10 years: nearly1 million fewer people are on benefits; 2.5 million more are in work; 300,000 more lone parents are in work; and the numbers on incapacity benefit are falling for the first time. Freud has concluded that by any measure, the Government's programme of new deals had been a success. "Freud's view is that welfare policy now needs to focus on those furthest away from the job market, particularly those on incapacity benefit and lone parents, and that the new focus should be on job retention as well as job placement. Progress in all these areas is essential if we are to meet our aspiration of 80 per cent employment and to eliminate child poverty by 2020, ensuring not just a strong economy but a strong society."Freud has made four principal recommendations. First, in recognising the success of Jobcentre Plus in helping people to get back to work quickly, he believes that we should maintain Jobcentre Plus at the core of the system, but focus it on helping those who are unemployed for short periods, potentially expanding that approach over time so that Jobcentre Plus provides a one-stop front end for all benefits. "Secondly, Freud recommends that once claimants have been supported by Jobcentre Plus for a period of time, back-to-work support should be delivered through outcome-based, contracted support, drawing on the innovation of specialist providers from the private and voluntary sectors. The contracting regime would set a core standard that everyone would receive, but beyond that there would be freedom between the provider and the individual to do what works for them, rolling up the existing patchwork of public, private and voluntary provision in favour of a more flexible approach focused on the specific barriers facing the individual rather than the specific benefit which they are on. "Freud suggests that payments to providers could be made over a three-year period from when an individual client moved into work, with contracts offering rewards that are proportionate to the value to society and the taxpayer of moving into work. This approach would work as a public-private partnership to deliver up-front investment in order to realise savings over the life of the contract. Payments would create incentives to develop programmes across the full spectrum of clients to avoid cherry-picking of the easiest clients to help."Thirdly, in return for offering this extra help, Freud proposes that we should expect more work-related activity from those on benefit. The report suggests introducing stronger conditionality in line with jobseeker's allowance for lone parents with a youngest child aged 12, and, as wraparound childcare becomes available from 2010, to consider whether further reductions would be desirable. He also recommends over time, and as further help and support becomes available, extending the requirement to undertake work-related activity to those already on incapacity benefits who migrate to the new employment and support allowance."Finally, citing international evidence that complexity in the benefits system can act as a disincentive to entering work, today's report recommends that we should look in detail at the potential for greater simplification of the benefits system itself, moving towards a single system or, ideally, a single benefit."These recommendations represent the opportunity for a step change in the nature of our welfare system in Britain. As I have said before, the publication of today's report marks the start of the debate, not the end. The Government will be considering these proposals and will come back to the House with a fuller response later this year".
	My Lords, that concludes the Statement.

Lord Skelmersdale: My Lords, yet again, we find ourselves in a curious position. The Government, in the shape of the Prime Minister and the Chancellor of the Exchequer, chose to launch this report outside Parliament this morning. While I am grateful to the Minister of State for repeating the Statement in this House, he is doing so only as a result of what is now called an "urgent Question" in another place. The expression "kicking and screaming" comes to mind. This is odd when so much of it was leaked over the weekend.
	Now that we have it, I too should like to thank David Freud for his useful contribution to the debate on welfare reform. But is not the report a very odd animal indeed? It is subtitled,
	"An independent report to the Department for Work and Pensions".
	Yet the last sentence of the foreword states:
	"I would like to thank the Department and—
	heavily underlined—
	"my team within it for all of their help in preparing this report".
	Just how independent is this report? Although it is obvious that the beginning of the report is pure government/DWP spin, are the three great ideas—I am afraid that I could not find a fourth—in the rest of the report those of the author or of the department?
	I like to think that I am no conspiracy theorist, but I rather wonder whether a report commissioned in December and produced at the beginning of March, effectively 10 weeks' work at the maximum, really represents strategic thinking when compared with, say, the report of the noble Lord, Lord Turner,on pensions. That took from December 2002 toApril 2004, and that was only the first report. The second one was not published until the following year. So my question on this report is: why the rush here? What is the next stage? I note that there is to be a government reply later. Will that response be in the form of a Green Paper or is this report just that, and to be followed by a White Paper?
	I have just mentioned the three great ideas. The first is contracting out what the report calls, "intensive individualised support". This, I suppose, is akin to a personal adviser in the Welfare Reform Bill, although I still have not established precisely whether that is so. However, the suggestion here is rather different in that it is proposed that the contracting-out will happen only after a period that is unspecified, so far as I can tell. This is indeed different from the situation in the Welfare Reform Bill. Do the Government intend to amend the Bill on Report?
	Next is the somewhat obscurely worded,
	"modelling outcome-based contracting for long-term worklessness".
	I am on record many times as saying that I believe in the dignity and financial security of work, but I also believe that this is an imperative in itself and should not be driven by the Treasury's desire to save money, although if welfare-to-work is successful, savings will accrue. However, the prognosis is not good. According to recent figures, the New Deal for Young People has very unhappy outcomes. Nearly 50 per cent of young jobseekers who have left the programme end up back on benefits within the year, according to a Written Answer published on 10 July 2006 in the Official Report of another place. The number of those leaving the programme to go on to jobseeker's allowance rather than into work increased from 4.1 per cent in March 1998 to 18.6 per cent last year. That worsening trend is repeated in the New Deal 25-plus, where36 per cent now return to JSA compared with 3 per cent in June 2001, according to the DWP longitudinal study.
	That might be because of no real push. I agree with the report that the right to benefits should go with responsibilities. However, I believe that sanctions should be applied only by the state and not by private or third sector contractors. The House will know that we are having that discussion right now in the Welfare Reform Bill, where we have discovered that the Government have not made up their mind on this issue. This is of course of particular importance where lone parents are concerned. Do single parents not believe, quite rightly, that their first responsibility is to their children? The only way that I can see of sustaining those adults in employment is to make childcare and after-school activities much more widely available and, even more importantly, affordable, especially as the report recommends benefits being conditional for parents with progressively younger children. Otherwise, all that is left to the parent is part-time work, which does not suit every employer by any means, and often does not suit the lone parent either.
	To my mind, the last great idea—of all benefits being combined into a single system—blows the Welfare Reform Bill right out of the water, as it does away with most premiums in a progressive manner. The only way I can see of achieving a single system is with a myriad of these premiums. Does a single system mean doing away with the distinction between income-based and National Insurance-based benefits? I am sure the Treasury would raise its eyebrows at that suggestion.
	It may be that many of these questions will be answered by a careful study of the guts of the report, to which of course I am committed, but those pertaining to the Government's reactions to it are for now.

Lord Oakeshott of Seagrove Bay: My Lords, I thank the Minister for repeating the Statement made in another place under extreme pressure from my honourable friend David Laws, without whom it would not have been made. If he had not demanded it, we would have ended up with the usual business of a series of leaks in the Sunday newspapers, a press conference and no Statement in either House of Parliament.
	Tony was sitting on the sofa a few days before Christmas, scratching around for ideas for his legacy, so he asked David to come up with some ideas on the back of an envelope. Some of them were actually quite bright ideas; David Freud, like lots of other likely lads in the City, is a pretty bright kind of guy. I am afraid, though, that he leaves some pretty unhappy memories as the man who sold Eurotunnel, Euro Disney and Railtrack to an unsuspecting public, and I hope that on this occasion his ideas do not cost claimants or taxpayers so much.
	The real question, as the noble Lord, Lord Skelmersdale, has said, is why on earth we are getting these proposals slap bang in the middle of the Welfare Reform Bill. The Bill has had 15 days of serious scrutiny in Committee in the Commons, and, as the Minister will know, we had the pleasure of eight and half solid hours on Wednesday or Thursday, scrutinising, probing and discussing many of the ideas covered by this report. In particular, we discussed at length—and, I assure him, on Report we will be returning to—the question of whether private contractors are allowed to sanction benefits. Why are we having this rabbit out of the hat in the middle of all that? Does this not just show what contempt the Prime Minister now holds Parliament in?
	On the issue of getting more help for vulnerable groups, does the Minister agree with David Freud that intensive individualised support is expensive? Is he confident that there will be the resources to support the Freud strategy, including implementing the Layard proposals on mental health, which we strongly support from these Benches? Does he agree with Freud that the UK skill base remains mediocre by international standards? If so, what extra educational support will be available? Does he agree with David Freud on the scope for an expanded role for Jobcentre Plus—for example, delivering a one-stop shop for all benefits and credits?
	On lone parents, we believe that the Government are right to consider bringing Britain more into line with other developed countries, but that must only be if there is special protection for parents with disabled children. It would be quite wrong to pressurise single mothers into work when proper childcare is not freely available. That would just store up serious social problems for the future.
	What exactly does
	"as wraparound childcare becomes available from 2010"
	mean? Noble Lords may not have noticed that the report then suggests that the age of 12, the age above which there would be pressure on single mothers to go to work, could be reduced further. We would need a great deal of convincing on that.
	I see that the Freud report recommends that we should look in detail at the potential for greater simplification of the benefits system. We certainly support that. Gordon Brown, the king of means testing, has woven such a tangled web of tax credits and means tests that many poor people now face higher effective top tax rates than the super-rich. What greater disincentive to work could there be than that?

Lord McKenzie of Luton: I'm so sorry—no discourtesy was intended. I hope noble Lords will recognise that through the passage of the Welfare Reform Bill we have done our best to share information on an open basis and engage with noble Lords across the piece. That is our approach generally to welfare reform.
	The noble Lord, Lord Skelmersdale, asked: why the rush? There is nothing sinister about all this. The report was intended to be a contribution to the Prime Minister's policy review, Pathways to the Future, and the timescale in which it has been delivered is entirely consistent with that.
	On the issue of contracting out and whether we need to amend the Welfare Reform Bill because of these proposals, there is, as the Statement indicates, no particular issue arising from the report that we are looking to amend in the Bill. The report has a lot in it, and the Government need to consider it in some detail. We will come forward with a response during the course of this year.
	The noble Lord, Lord Skelmersdale, and, I think, the noble Lord, Lord Oakeshott, talked about private sector sanction in our debates on the Welfare Reform Bill. As we have set out in those debates, any private contractor allowed to take sanctioning decisions will be subject to all the same checks and balances as Jobcentre Plus, including independent appeal rights, but we have not made any decisions about contracting out decision-making for sanction, as noble Lords will be aware.
	The New Deal was challenged as not having delivered. As the report itself makes clear, the New Deal has been a success story: over 1 million into work through the New Deal for the unemployed; 480,000 lone parents have been assisted, a programme that more than pays for itself; and Pathways to Work has delivered 9 percentage points more people into jobs. But we need to build on the success of that programme, which is what the Freud report is largely about.
	The noble Lord, Lord Oakeshott, asked what wraparound childcare was. As noble Lords will be aware, the proposal is to have childcare from eight in the morning until six in the evening right across the country. It is important, particularly if the measures for lone parents are to be taken forward, that we break down the barriers that prevent lone parents who want to work and have a right to do so from getting into work. Making sure that childcare is available and affordable is key, and we need to ensure that we deliver on that.
	The issue of simplification of the benefit system was raised by both noble Lords. The noble Lord, Lord Skelmersdale, raised some particularly pointed issues about some of the ramifications if we were to have a single benefit system. Whatever the challenges, we should recognise that it is appropriate to simplify where we can along the way. There is a Benefit Simplification Unit, which we recently debated when discussing the up-rating Statement. The employment and support allowance itself is a simplification measure which is dealt with in the Welfare Reform Bill, as is the local housing allowance. We always need to keep these matters under review. However, with benefit systems, as with tax systems, there is often a trade-off between that which is simpler and that which is fairer. That should always be borne in mind in this debate.
	Benefit simplification does not render the Welfare Reform Bill redundant, as I have just outlined. The employment and support allowance is one simplification measure—a step along the way to that—but no one is suggesting that there is a magic wand to combine all the benefit system into one simplified and single benefit in the very short term, if it could ever be achieved.
	The noble Lord, Lord Oakeshott, talked about resources. Freud's proposal is to have these contractual arrangements as a public/private partnership which would encourage investment at the front to generate the savings along the way. That would clearly be one way to address resources. However, it is important that resources are there to make a reality of that. The noble Lord is quite right that if we are to give focused individualised support to individuals, the best way to get people back into work, it will be expensive. It has ramifications. However, the benefits of doing so are right not only for the individual and their family, as it is the best way out of poverty; it has benefits for the state as well. It is to have people who are in work and paying tax rather than people who are out of work and receiving benefits. Those are the issues that need to be looked at.
	I hope that I have dealt with each of the points raised by the noble Lords, Lord Oakeshott and Lord Skelmersdale. If I have failed to do so, I am sure that they will seek the opportunity to raise further points.

Baroness Hollis of Heigham: My Lords, I have a few comments and queries about the aspect of the report dealing with lone parents. The push of the report, which is to encourage lone parents back into the labour market, is absolutely right. I was struck by the fact that the best predictor of outcomes for a girl child of a lone parent—she does not become pregnant, she stays on at school, she gets decent results and goes into a job—is that her mother is in work. The best predictor for a boy child—he does not truant, he does not get into trouble with the law, he stays on at school and gets results—is if he is in contact with his natural father. Whatever the technical or legal relationship of the parent, it is absolutely right to ensure that fathers do not walk away from their responsibilities, especially to boy children. Those moves are to be welcomed.
	We also know that the most successful new deals are with those who volunteer—the lone parents who are not required to come, who are the youngest, have the youngest children and are closest to the labour market. Once lone parents have been out of the labour market for 10 years or more, it is very difficult to get them back in. The question is: why? My criticism of the Freud report is that I am not sure that it addresses properly the stumbling-blocks to lone parents re-entering the labour market after 10 or more years out of it.
	As we all agree, skills are the first problem. Perhaps half of the lone parents out of the labour market for that length of time effectively have the literacy level of a 10 or 11 year-old or are even functionally illiterate. Equally significant is the health problem. Alan Marsh and Richard Dorsett of the Policy Studies Institute have said that before we can get welfare to work, we have to have welfare to health because, on average, lone parents are twice as likely to smoke as non-lone parents and are associated with respiratory illness and asthma, and 75 per cent of their children in turn have respiratory problems. Lone parents may have poor mental health or depression and may be overweight.
	Also associated with the problem is the isolation and the lack of a knowledge network, which has also not been addressed properly. Finally and above all, there must be childcare that is trustworthy. Wraparound childcare sounds fine, but unless a lone parent can find childcare that fits with the job that she can get, she will not re-enter the labour market. That childcare is most likely to be offered by her own parent—a grandparent—not necessarily by child minders who are reluctant to work the unsocial hours that are the only hours available for many lone parents in part-time jobs.
	I do not think that the analogy with Europe is helpful because lone parents do relatively well in the labour market in Europe. They live in extended homes where other family members pick up the childcare and share that responsibility. In Britain, living in homes on their own, there is no one to whom they can turn for that help and support, which is why, unlike in Europe, lone parents have lower participation rates in the labour market than married women. Therefore, I gently suggest to my noble friend that it is still a very male report—heavy on condition and rather weak on the understanding of what holds lone parents back from the labour market.
	We need more of three things. We all agree that we need the health and skill strategy. Secondly, we need to develop the concept of mini-jobs. We know that the best predictor of a lone parent going into work is that she held a mini-job the year before. What do we do? We make sure that if she does, we take 100 per cent of her money away. We must rethink our attitudes to earnings disregarding mini-jobs. Finally, we need to rethink our attitude to childcare and go for the childcare that the lone parent trusts, which means that she is confident to go into work knowing whether or not the child is poorly, comfortable or had a bad day at school. A granny is there to cope if a granny so wishes to do it. Grandparents must become entitled to the childcare tax credit. If we address those three things, lots of the problems of conditionality will disappear. If we do not, the problems of conditionality will remain and too often we will be kicking lone parents, who do a very difficult job in a very difficult climate, back into a labour market without the support that they need.

Lord McKenzie of Luton: My Lords, I understand my noble friend's concerns and his desire to get to the nub of these issues. The Statement was simply a repeat of the Statement made in another place, which was outlining what was in the Freud report, and was not intended to go further than that today. I repeat the final paragraph of the Statement, which says:
	"As I have said before, the publication of today's report marks the start of the debate not the end. The Government will be considering these proposals carefully, and will come back to this House with a fuller response later this year".
	My noble friend referred to a sledgehammer to crack a nut. In spite of all that has gone on in welfare reform and the progress that has been made, we still have well over 2 million people stuck on incapacity benefits for more than a year, 500,000 lone parents with school-age children out of work and on benefits, and one-third of JSA claimants who have spent more time on benefits than in work. So there are still some real issues to address, and we believe that the Freud report is a contribution to addressing them. But we need to come back, and will come back, with our detailed comments and thoughts on these proposals.

Baroness Turner of Camden: My Lords, I have but one short question. Employment is down to employers and the provision of appropriate part-time employment, to which my noble friend Lady Hollis referred, is dependant on employers being willing to offer it. Are steps being taken to try to recruit employers to this objective?

Baroness Morris of Bolton: My Lords, I am sure that the Minister will agree that it is no good trying to solve the problems of one generation by simply passing the problems to the next. As my noble friend Lord Skelmersdale said, the main responsibility of lone parents is to their children. The age group of 11 to 16 is a vulnerable one, when too many good children are drawn like magnets to gangs and bad company, and the last thing that we want is more children hanging around on street corners. Can the Minister assure the House that as well as appropriate childcare—and I absolutely agree with the noble Baroness, Lady Hollis—there will also be appropriate activities for that 11-to-16 age group after school, such as sport, that will keep them engaged and involved?
	My Lords, as I understand it, the eight-till-six wrap-around childcare will include after-school clubs and the opportunity to participate in sports and other activities. I cannot from the Dispatch Box list all the things and opportunities that will be available more generally. However, the noble Baroness is right: unless there are opportunities for people within that age group and others to be engaged, this measure will not work as it should.

Lord Davies of Oldham: My Lords, I beg to move that this Bill be now read a second time.
	This is a short, straightforward and functional Bill which has nothing to say about the policy, nature or operation of a planning-gain supplement. It has been introduced to ensure the regularity and propriety of government expenditure in line with government accounting rules.
	It is a simple one-page, three-clause paving Bill, which gives authority for the Commissioners for Her Majesty's Revenue and Customs, the Northern Ireland department and the Secretary of State for Communities and Local Government to incur expenditure on preparations for the potential introduction of a planning-gain supplement. Should the Government decide to proceed with a planning-gain supplement, we will, of course, legislate for it in the normal way, so this House will have the opportunity to consider and debate any proposals further.
	As has been recognised by the Treasury Select Committee of the other place, the Government have approached Kate Barker's recommendation of a planning-gain supplement from her review of housing supply in 2004 with the utmost diligence and seriousness. The Government welcome the active parliamentary interest of both Houses in the planning-gain supplement. Development affects us all and I think noble Lords will agree with me that it is only right and proper that local communities should benefit from that development in some way.
	The Government announced in the Pre-Budget Report that they would move forward with the planning-gain supplement if it were deemed workable and effective. The Government believe that it would be wrong to rush into a decision on this matter until we are satisfied that any proposals will work as intended and that they are comprehensive and effective. Therefore, this Bill is only a paving measure to ensure that, should the Government go ahead with the planning-gain supplement, the infrastructure to build the systems to support it can be put in place and tested well in advance of any introduction—which, we have said, would not be before 2009. I am sure that the House will recognise that, should we go ahead with a workable and effective policy, a workable and effective IT system to support it would be equally as important.
	The prospective operation of a planning-gain supplement has been widely debated during consideration of this preparations Bill in the other place. It is worth setting out the aims of the issue before us. Planning-gain supplement aims to help facilitate the creation of new development and economic growth by providing additional resources to finance the critical infrastructure—from roads and transport to schools and health facilities—needed to make growing communities sustainable. It is important to point out that the planning-gain supplement should not be seen in isolation. This Government have implemented important reforms to bring forward more land for housing, and planning-gain supplement is part of a broader agenda.
	The Government recognise that development needs to be supported by adequate infrastructure. There is no use building a housing development if the people who live there are not supported by the necessary facilities. Such facilities that are needed will, of course, be dependent on local priorities. I feel there is a widely shared view that developers should make contributions to finance that infrastructure; and there is an evolving consensus around the need for additional infrastructure to support growth and for capturing land value as a means of providing that infrastructure.
	The planning-gain supplement is one solution, seeking to solve a national problem at a local level. The Government believe that a planning-gain supplement can be a fairer, more efficient and more transparent way of capturing land value uplift than the current planning obligations regime or the theoretical and untested land value tax.
	The House will note the history of development gains taxation. Indeed, some commentators have pointed to the history of past taxes as a means of comparison with the Government's planning-gain supplement proposals. However, closer examination of these past taxes would show how very different they are from planning-gain supplement. The Government have made it very clear that, unlike past development land taxes, the planning-gain supplement, if introduced, would: be levied at a modest rate in order to preserve incentives to bring land forward for development; be based on clear and simple definitions of value; and minimise avoidance opportunities.
	Some have argued that a tax based on property valuations is simply unworkable and that valuations are an art, not a science. However, I point out that valuations are an integral feature of other taxes which have broad acceptance, such as business rates. Of the 60,000 property valuations each year for inheritance tax and capital gains tax purposes, only a handful of cases are taken to the Lands Tribunal. In addition to this, business already makes multi-million pound decisions on the basis of property valuations.
	The Government acknowledge that there may be complex cases. This is why we are specifically consulting the industry on our approach to valuations for the planning-gain supplement, to ensure that we fully understand any issues. The Government have proposed a self-assessed valuation system based on clear definitions and well understood assumptions, which would be evaluated by professional surveyors at the Valuation Office Agency on a risk assessment basis.
	The Government have made it clear that the planning-gain supplement is an essentially local measure. It is a hypothecated tax, in which 70 per cent of the proceeds will be returned directly to the local authority area from where they derived for local infrastructure priorities. This unprecedented commitment by government is to ensure that all communities better share in the wealth generated by their planning decisions. It should serve as an incentive for communities to support needed growth. The Government announced in the 2006 Pre-Budget Report that all planning-gain supplement revenues generated in the devolved Administrations would be returned to the country in which they were generated, and not be subject to the same conventions as those in England.
	In considering this preparations Bill, the Government have welcomed debate on the underlying policy and operation of a planning-gain supplement. Indeed, the Commons Communities and Local Government Select Committee has already produced an insightful report, which has been important in shaping the Government's proposals. Alongside that, the Government are concluding the three detailed consultations that we announced in the Pre-Budget Report and examining the responses received. Although any final decision on the implementation of a planning-gain supplement would be for another place, I extend the Government's thanks to all those who have participated in the consultation exercises.
	These consultations indicate the Government's commitment to developing the planning-gain supplement in a prudent manner on this policy, and to consulting not just on its principle but on its detail. That consultative approach will continue. I know that many in this House have significant expertise and that if the Government decide to introduce the planning-gain supplement, then substantive legislation will be brought before Parliament. Of course, the Government would publish a full regulatory impact assessment, so I can promise this House that should the Government proceed with the planning-gain supplement there would be more opportunities to debate the proposals.
	I return to the Bill before us. This preparations Bill is merely a paving Bill to authorise the Commissioners for Her Majesty's Revenue and Customs, the Secretary of State for Communities and Local Government and the relevant Northern Ireland departments to incur preparatory expenditure. The House will note that, as the Bill deals solely with authorising expenditure, the Speaker of the other place has classed this as a Money Bill, under the terms of the Parliament Acts 1911 and 1949. HMRC's commissioners need this power because administering the planning-gain supplement is not a function they currently possess, and without the power they would not be able to make the preparations necessary to administer that in time for 2009. The Secretary of State and the Northern Ireland departments need these powers because, while they possess common-law powers to incur expenditure, they need regular parliamentary authority in accordance with the Public Accounts Committee concordat and the new service rules in government accounting for any activity on which expenditure could exceed £1.5 million over more than two years.
	While the Bill authorises those three parties—HMRC, the Secretary of State and the Northern Ireland departments—to incur preparatory expenditure, the burden for building the administrative systems and ultimately for managing the planning-gain supplement will fall primarily to one; namely, Her Majesty's Revenue and Customs. Its expenditure prior to introduction of any further legislation will include: new information technology for the planning-gain supplement and adaptation of HMRC's existing system; designing the business systems necessary to administer the tax, and putting appropriately skilled staff in place to manage it; and equipping the Valuation Office Agency and the Valuation and Lands Agency (Northern Ireland) with the necessary facilities to help administer the planning-gain supplement, including staffing, training, accommodation and IT equipment.
	These administrative functions would, of course, have to be based on further substantive legislation, and be properly tested and in place prior to implementation of the planning-gain supplement, which we have said would not take place prior to 2009. Expenditure incurred by the Secretary of State for Communities and Local Government prior to enactment could include the adaptation of existing government IT planning resources—specifically, information technology used to monitor the planning system known as the planning portal, which is administered by that department. The Bill, and therefore the implementation of the PGS, will not require any preparatory administrative functions to be carried out by the devolved authorities in Scotland or Wales, although the supplement would apply throughout the United Kingdom if introduced.
	As I have mentioned, the Government have just concluded a round of consultation and are analysing the responses. The passage of this Bill is neededin advance of any decision on a planning-gain supplement, so that if an affirmative decision is taken later this year, then the Government can start to build the IT administrative systems immediately to support it successfully and in a timely manner. It is in no one's interest to proceed with implementing the planning-gain supplement until such time as we are satisfied that the policy is workable and effective as a means of capturing land value uplift, to finance infrastructure and support growth.
	The Financial Secretary to the Treasury clearly stated during the passage of this Bill in the other place that if the Government decide not to go ahead with the supplement, then no further expenditure will be incurred under this legislation. If the proposals to introduce a planning-gain supplement are not confirmed, there will be no expenditure on preparations going beyond the Government's current work on the feasibility and workability of the scheme.
	With this Bill, we are trying to ensure that, if introduced, the planning-gain supplement would be administratively efficient and customer-friendly. Getting the IT right is absolutely imperative. To do that requires HMRC and its IT partners to have sufficient lead time to build and test those systems properly. In introducing this Bill now, the Government seek to avoid a situation where a decision to progress the planning-gain supplement is taken later, but the authority to commence the design and building of systems needed to run the programme is not there. Your Lordships will know only too well that the parliamentary calendar may not allow the timely enactment of such a Bill if introduced later this year. Such delays would reduce the time available to design, build and test the necessary IT and therefore could create greater risks to ensuring a smooth introduction of the policy.
	In conclusion, the Bill is simple and straightforward; it is to authorise expenditure to allow the Government, pending further decisions on whether to introduce the planning-gain supplement, to prepare adequately for the administration of this policy prior to implementation. A number of key points of consensus have emerged, as I have pointed out, around the need to support growth with necessary infrastructure, and for the principle that land value capture is a viable means of providing finance for that infrastructure.
	The Government have welcomed this debate. We have always been open to consultation on our proposals for the planning-gain supplement, and expect further examination of this policy if we choose to advance it toward introduction. Put simply, this short and straightforward Money Bill enables the Government prudently to prepare for the introduction of a planning-gain supplement, enabling sound management and efficient delivery of the underlying policy—on time and on budget—should we decide to go in that direction. I commend the Bill to the House.
	Moved, That the Bill be now read a second time.—(Lord Davies of Oldham.)

Lord Stewartby: My Lords, competition to take part in this debate has been so fierce that the list of speakers has had to be substantially reorganised to accommodate us all. I should point out that I am not aiming to tread on the toes of my noble friend Lady Hanham, who will be a wind-up speaker.
	Thirty years ago, for my sins, I was appointed opposition spokesman on the then Development Land Tax Bill. My sins must have been great, because it turned out to be a long and gruelling committee, but I learned quite a bit about a subject with which I had not been previously very familiar. I do not want to get into the details of any particular previous tax, or of the potential tax gain that may follow this paving Bill. However, I want to make one or two brief remarks to highlight some concerns that arose—and of which I became particularly conscious—in considering the development land tax.
	It is not difficult to make an intellectual case for having some form of tax on the windfall element of gains, and I do not think that anyone would try to argue otherwise. The problem is how it is done; it is sensible that the Government are taking this at a steady pace and not a gallop, as there are many potentially conflicting elements to the case for or against such a charge.
	The points made by the Minister on benefits to local development are perfectly valid. The difficulty is that there are negative economic impacts with charges of this kind, because if there is a disincentive for owners to sell their land, they are likely not to sell it at all. The one thing that one would want to avoid, particularly in current market circumstances, would be anything that made it more difficult to bring forward land for development. One has to accept that any impost of that kind would be likely, if it had such an impact, to reduce the supply of land and aggravate shortages that already existed. Furthermore, the land sold would be likely to be more expensive, because if the seller wished to preserve the yield from the disposal of his land and less of it came to him, that would undoubtedly be a factor. One cannot get away from the fact that both those factors would put upward pressure on land prices and, therefore, on housing prices. I hope that the Government will think hard before taking any steps that would be likely to impede the supply of development land. I would have thought that it would be of benefit to take some steps—I do not know what they might be—to encourage the supply of development land, rather than to go in the opposite direction. We do not want to make dwellings more expensive than they are in the current market; so I ask the Minister, who has put forward the case for the paving Bill with his usual lucidity and good sense, to ensure that the Government look at the conflicting aspects of a charge of this kind and make sure that the measure does not run into the law of unintended consequences and find that the practical effect is not beneficial or counteracts the other beneficial elements of the proposed charge.
	I did not expect to be the second speaker in this debate, so I have confined my remarks to those brief reminiscences about the development land tax—but many lessons should be learned from that tax and need to be borne in mind if we are considering going down a similar path.

Baroness Miller of Chilthorne Domer: My Lords, I will bear in mind the Minister's remarks that this is a paving Bill. However, I feel moved to speak. If the Bill progresses further, I hope that the assumptions, policy and IT systems designed for it will be able to accommodate exemptions.
	I want to talk specifically about exemptions for exception sites in rural areas. The current situation is dire. The noble Lord, Lord Stewartby, has just dealt with whether the planning-gain supplement is likely to make it more difficult to develop land. The top issue in rural communities is the lack of housing. As the Minister himself may be aware, for at least the past five years the Commission for Rural Communities has highlighted that as its number one issue. The Government reacted in 2005 by creating the Affordable Rural Housing Commission. The commission duly reported. I should declare an interest here as I served on the Joseph Rowntree commission, the work of which fed into the Elinor Goodman commission inquiry. The Government have yet to act positively on any of the recommendations of the Affordable Rural Housing Commission.
	The Government themselves estimate that 11,000 new homes will be needed annually, at a price which enables those with an income of less than £17,000 per annum to make use of it. The Commission for Rural Communities goes even further. It believes that about 31,000 affordable homes will be needed annually for at least the next five years, whereas only 1,700 are being built annually. Whichever figure one accepts, there is an enormous shortfall. The price is being paid by rural communities, members of their younger generation leaving for the towns in droves because there are simply no houses for them.
	The situation is ridiculous. The Government talk about sustainable communities but, because of this housing shortage, they have condemned rural communities to a situation which is anything but sustainable. The Minister may say that the Government do not need to go to the trouble in rural areas of exempting exception sites for affordable housing, but these sites are developed only because they are an exception to the usual rule of no further development.
	The Government may say that the availability of such sites for affordable housing will deflate land values. However, evidence shows that land values rise significantly after planning permission has been given even when new developments include an affordable housing element, and even when the planning permission may be solely for affordable housing. Regardless, there is an overwhelming argument that, as this new tax is considered, nothing must be done to reduce the supply of land of land for houses in rural communities.
	The Government themselves recognise the value of these sites. They were about to get rid of them last year when the Minister, the noble Baroness, Lady Andrews, made the wise and significant decision in the government U-turn on preserving exception sites. It was a particularly helpful move.
	I conclude by providing some figures showing why the sites are so important and must not be discouraged. According to the best figures of the Rural Housing Trust, a key housing trust in this area, about 2,450 exception sites have provided 19,600 homes since 1989. The Minister may not think that a great number, but he should bear in mind that those homes were provided in the smallest communities in Britain, those which are hardest to sustain. If these villages are not to be condemned to being ghettos for the very elderly and the very wealthy, the Minister will have to take serious account of the situation in those areas.

Baroness Hanham: My Lords, I declare an interest as a member of a local authority and of a planning committee. I am moving myself slightly out of my normal role on the Department for Communities and Local Government, on which I hope we will have the matter to discuss further on, if it comes about.
	I thank the Minster for his introduction to the Bill. As he and others have said, the Bill has been certified as a Money Bill within the meaning of the Parliament Acts 1911 and 1949. As the noble Lord, Lord Newby said, this therefore will be the only stage, apart from a formal Third Reading, when we will have an opportunity to consider it. As that is the case, I wish to put forward the significant concerns we have, some of which caused my honourable friends in the other place to oppose the Bill throughout all stages of its progress.
	Before looking at the issues in detail, I would like to set out that we on these Benches accept that developers should make an adequate contribution to infrastructure costs in return for receiving permission to develop land, but we do not believe that the planning-gain supplement is the way to achieve this, especially as it is in addition to the existing Section 106 arrangements. As my noble friend Lord Stewartby, pointed out, the windfall element is understood in planning and development, but it is imperative that whatever is introduced does not impede the supply of development land.
	As the Minister has explained, this short, three-clause Bill will enable Her Majesty's Revenue and Customs and the Secretary of State for the Department for Communities and Local Government to incur preliminary expenditure to set up the business processes needed for the planning-gain supplement's introduction—now delayed to, I think, 2009.
	As the noble Lord, Lord Newby, pointed out, this Bill is somewhat previous since the Government cannot give any information, nor even one of those best guesstimates with which we are becoming all too familiar, on what sort of costs are likely to be incurred. Perhaps the Minister could enlighten us. Indeed, the Government have not actually yet committed themselves to implementing the planning-gain supplement; they have only indicated that it is currently a "lead option"—a phrase which the other place argued is actually the culmination of a watering-down of the Government's commitment, in the face of wide hostility to the proposals.
	If this lead option is dropped, then what? At what stage is it expected that expenditure on the systems will start to be incurred? Is it the intention that that should be dependent on a full—rather than a partial, because that has already taken place—regulatory impact assessment, which has not yet been carried out? Or will expenditure be incurred before this is completed? This Bill could effectively allow taxpayers' cash to turn to waste, I am afraid one might say, again.
	The Bill has no limit on how much can be spent. Indeed, the Opposition suggested amendments to deal with this in the other place in Committee. The Explanatory Notes are very vague on costs, hinting that they could exceed £50 million—but by how much? Another £50 million? £2 million? £4 million? If we compare this figure with the closest precedent—the 1998 Tax Credits (Initial Expenditure) Act—which led to the much-troubled tax credit system, Her Majesty's Government are effectively suggesting that the planning-gain supplement is likely to cost twice that required to set up a system that supports some £16 billion a year of public resources.
	Not only is the Minister asking for a blank cheque for something that might never happen, but there is huge concern that if this system is implemented it will be complicated and bureaucratic. Also, the Government have an appalling record with IT systems, most of which have either a history of long and troubled implementation or large cost over-runs, so we can have no confidence that support for this measure today will be anything more than a fig-leaf to justify unassessed expenditure. I am sure that I do not have to remind your Lordships' House that the Chartered Institute of Taxation is very unimpressed with these proposals, stating that,
	"not even a well thought out consultation document can save a bad idea and we think that the law of unintended consequences will apply, with the result that the proposals will not deliver the Government's policy objectives".
	During Second Reading in the other place, the Minster suggested that this was only a paving Bill, and that it did not say anything about,
	"the policy, nature or indeed operation of a planning gain supplement".—[Official Report, Commons, 15/1/07; col. 561.]
	The Minister said again that the opportunity would arise to discuss those areas if the Government decided to introduce legislation, and that they should not form a significant part of the debate on the Bill. I disagree. If Parliament is being asked to provide a blank cheque we must consider the proposals that that blank cheque will potentially be funding.
	The planning-gain supplement is yet another example of a Labour stealth tax—this time on development and affordable housing rather than a genuine attempt to finance infrastructure in development areas. The Confederation of British Industry goes as far as to suggest that it is a,
	"threat to the competitiveness of UK business and the long-term health of the UK economy".
	The current proposals are that the planning-gain supplement is to be centrally collected and then redistributed according to government fiat or, as currently described and as the Minister said, on a basis of 70 per cent being returned to the relevant local authority area, unlike the current working of Section 106, under which everything goes back to the local council, as the noble Lord, Lord Newby, said. Thirty per cent of the tax in England is intended to be regionally administered by the undemocratic and unrepresentative regional bodies—we go back to these—presumably the regional planning bodies. On what it does not say, but one might ask the Minister on whose plans that portion will be spent. Will it be the Government's, the regions', or the local authorities' within the region? Who will decide the priorities of that 30 per cent?
	It is well known that people tend to be pro-building projects as long as they are not in their own backyard. If we are to change this attitude we must persuade people that they will see genuine visible benefits coming back to them from development in their area. A regionally administered system does little to provide reassurance; there is nothing to stop money being redirected towards another corner of the region, remote from the original community. The Government have also failed to address fundamental questions about cross-border implementation and working of the tax, a hotly debated issue in the other place.
	On top of this, the National Housing Federation has pointed out that the planning-gain supplement is likely to hinder, rather than help, the creation of affordable housing:
	"By charging PGS on affordable housing, the Treasury will simply be pushing money around the public funding system ... If PGS is levied on housing associations, a proportion of Housing Corporation grant for social housing will effectively be paid back to the Treasury via PGS, and fewer homes will be provided. Moving funds from one part of the public purse to another is not efficient".
	The noble Lord, Lord Newby, found a number of people opposed to this whole process. He quoted the CBI, and I add the British Chambers Of Commerce and the Local Government Association. All have reservations about the proposals, and a consortiumof companies involved in property development commissioned research which concluded that PGS was unlikely to deliver the increased funding for investment in infrastructure, was likely to reduce the supply of smaller development sites, and would be likely to change the way some sites are developed as developers seek to minimise their PGS liabilities.
	The noble Lord, Lord Newby, mentioned the Corporation of London, so he and I have obviously both been well briefed by it. It has raised concerns about the PGS's effect on brownfield sites. The City corporation fears significant adverse consequences from the imposition of the tax on complex urban environments such as the City, particularly that the "before and after" approach to site valuation could result in a move back to outline consents and the freezing of property development, with consequences for the stock of world-class business premises.
	As with other commentators, the City is also concerned about the point at which development will be deemed to have started for the purpose of the tax to be clarified, as well as whether small-scale refurbishments will be excluded. I do not know whether this is in the Minister's brief; I raise it and, if he knows the answer, perhaps he will give it to me. In common with the many other bodies sceptical about the value of PGS over the current Section 106, the corporation points out that it relies on these funds to finance many facets of the City environment, and that it is doubtful that the revenue generated by PGS would be sufficient to provide the same level of infrastructure achieved through funds obtained by the operation of the current Section 106 system.
	Did the Minster see the article in the Daily Telegraph on Saturday, reporting that development contracts are now containing a "walk away" clause to be implemented if the tax becomes law, because of the large developers' concerns that it will add millions of pounds to the cost of public infrastructure projects, including the Olympics? These are all questions about the tax itself, and I am sure that the Minister will try to suggest that they are not relevant to today's debate—but they are. There is no point in our addressing the value of setting up the infrastructure to support the tax if the tax itself is suspect in its ability to do better than the one it is superseding—or, more correctly, adding to.
	If we step back from the detail of the PSG, the overarching question is whether it will work or not. Five previous incarnations of development tax have been tried. They have foundered on each occasion, principally over how to agree on the valuation to be taxed, an issue that the Government have failed to address and is now raised again. I remind your Lordships that, in practical terms, we must not forget the Government's record on new information technology systems, which have been notoriously difficult to deliver on time and on budget.
	We recognise that the Section 106 system is not perfect, that it is not implemented uniformly across the country—as the noble Lord, Lord Newby, has said—and that there are questions about transparency and appropriate use of the money raised. But it is widely accepted by local authorities and developers as a useful way of ensuring that benefits are achieved by the local community from developments within their borders. It may require limited reform, but it does not need to be superseded or top-sliced, or to be substituted or subordinated to a new stealth tax.
	I hope that I have given noble Lords a clear flavour of the range and depth of opposition to the Government's proposals on this issue. I guide them towards the debates in the Commons, should they wish to delve more into the topics. I hope that the Minister will note the concerns raised by all speakers so far, and undertake not to implement the terms of the Bill before and unless a decision is taken, after full parliamentary consideration, on the principle of the tax itself.

Lord Davies of Oldham: My Lords, I am grateful to all noble Lords who have spoken in the debate. I was a little surprised that the noble Lord, Lord Stewartby, was reluctant to take his position as number two in the batting order, after he and I opened the batting for the parliamentary side in Australasia on several occasions. I welcomed the chance of a fresh partnership today. He spoke, as we would expect, with his usual force.
	The noble Lord conceded the important point that an intellectual case could be made for PGS. We seek to make more than an intellectual case; he asked us to. He said that the issue is its practicalities. That is why this is a paving Bill, and why we need the resources and opportunity to set up systems and investigations which give us real insight into the complex, challenging issues involved. We do not intend to introduce any legislation before 2009 because we recognise how much work is to be done. In the mean time, this paving Bill provides for what ought to be done: a structure enabling us to be effective if there is a parliamentary decision that the planning supplement should go forward. That is the basis of this planning Bill.
	I was asked about the nature of the Bill in the more distant future. I cannot go into much detail about that for obvious reasons: we are at a preparatory stage. I give the House my, and the department's, working assumption that the Bill that will eventually emerge, if we decide to go ahead, will not be a money Bill, with the restrictions that that would impose, but open to both Houses for full scrutiny. I give reassurance on that. I cannot go into greater detail; I am sure that the House will recognise how limited I am in talking about such a distant prospect.
	The noble Lord, Lord Stewartby, opened the debate with a criticism of the Government. He spoke of the great danger if we get things wrong, that there would be a disincentive to sell land rather than encouraging it to become available. We all know the current demands upon land availability. The noble Baroness, Lady Miller, expressed particular concerns about small rural communities; I shall come on to that in a moment. She was merely identifying one dimension of the development issue. We bear the law of unintended consequences in mind.
	Given the history of development tax and issues of this kind, surely what is being enjoined upon the Government today—to take care, to make preparations, to consult widely and to look at all the dimensions of the issue to ensure delivery of successful policy—is exactly our reason for having this paving Bill. If we were not mindful of those considerations, were not responsive to those needs, were unimpressed by history and did not recognise the challenge before us, we would not have a paving Bill at this stage. That is its raison d'être.
	There was a broad base of criticism, first articulated by the noble Lord, Lord Stewartby, but it ran through several other contributions, although other noble Lords accepted the principle that development should produce some advantage to the public good. The noble Lord, Lord Newby, to be fair to him, said that he started out accepting that principle and that he disagreed with us about the strategy for realising it. I recognise those points. At least we have a consensus in the House that it is desirable that progress be made broadly in these terms but that it is a difficult target to hit. That is why we have this Bill.
	I reassure the noble Lord, Lord Stewartby, that the planning gain supplement is only part of a package of reforms designed to increase the supply of land brought forward. We do not regard it as the engine of development. Our recent planning policy statement identified a range of ways in which we expect to see land availability increase.
	The noble Baroness, Lady Miller, concentrated particularly on affordable housing in rural areas. I emphasise that the document to which I have just referred keeps rural exceptions for affordable housing. I recognise what the noble Baroness says: it is one of the critical features of village and rural life and we would not be making effective progress on planning if we did not recognise that feature, to which many noble Lords will attest.
	The noble Lord, Lord Newby, suggests that history is against us because there have been difficulties. He quoted a list of critics. It would be very odd if the Government did not come along with a list of supporters, too. As the noble Lord listed four or five critics, I will list four or five supporters. I list others, but I do not wish to detain the House further. Paul Bevan, the chief executive of the South East England Regional Assembly, indicated the Assembly's support in principle for these proposals. The Town and Country Planning Association and English Partnerships also support them. I could go on to list others. That is not gainsaying that several of the institutions mentioned by the noble Lord, Lord Newby, and the noble Baroness, Lady Hanham, as being critical of the measure are to be taken seriously. That is why we are involved in this long-drawn-out consultation and why we intend to proceed with care.
	The noble Lord, Lord Newby, reiterated the usual issues. Valuation is a difficult exercise; it is an art not a science, and the issue is much disputed. This Bill will not introduce valuations; they go on all the time. This difficult art form is practised very widely by many wholly professional organisations and individuals—and some less professional ones, we can also attest, on occasions. Of course valuation is an important part of the Bill but it is not credible to say that we ought not to make progress because of the extreme difficulty of effective valuation.
	The noble Lord placed great emphasis on the present Section 106 and that strategy for realising value and assets from development. The noble Baroness, Lady Hanham, also emphasised the point. We should all recognise the limitations of Section 106. If it were a panacea, there would not be widespread concern—even dismay—at the very limited realisation to the public advantage of a great deal of development. I respect what both of them say about the virtues of Section 106 but I do not agree with them that all is going swimmingly at present. That is not the point of view of this Government or a wide section of this country that thinks that, with rising land values there is a proper public concern, because many such values reflect public investment.
	We have many illustrations, but the one that is oft quoted and which stands up to public scrutiny is the fact that there is no doubt that the growth in land values along the whole extension of the Jubilee Line is not incidental or accidental because it follows that substantial investment in public transport. We all know the vast costs of that extension and the attendant land values that resulted. It is not the sole factor; other beneficial developments—I almost introduced the Dome at that point, but I do not wish to be too controversial—have enhanced these areas, providing facilities that have no doubt increased land values, but a critical factor is transport and the Jubilee Line.
	Both noble Lords speaking from the opposition Front Benches placed much emphasis on the present Section 106 structures. We do not accept that as the basis on which we should go forward. The noble Baroness, Lady Hanham, was concerned at the costs incurred by this paving Bill. We acknowledge that it incurred costs. The basis of our argument is quite straightforward: if as a Government we are convinced, and are able to convince Parliament, of the value of the process that will potentially be introduced in 2009, we would be criticised if we did not engage in substantial preparation for that time, because past failures have been the result of inadequate preparation and support systems. Success in this difficult area will be achieved only if there is an infrastructure to the legislation that guarantees its works. That is why we will need IT systems and to spend money to guarantee that any such Bill has an infrastructure to make it work. It is the whole rationale behind this paving Bill.

Baroness Hanham: My Lords is it usual for a Government to come forward for unexplained and unitemised expenditure? I said that we were passing a blank cheque. We do not know how much this will cost—how much the Government are asking the country to spend. There is no business plan as far as we can see because it has not been presented to us. Is it not an unusual thing to ask the House to do without the Minister indicating how much we are likely to be asking the country to spend?

Lord Davies of Oldham: My Lords, as this is a paving Bill limited costs, related to the objectives that I identified, will be involved. Of course it is unusual, because we do not have many paving Bills, certainly not paving Bills that look forward to legislation several years away—we do not intend to introduce this legislation until 2009.
	Noble Lords indicated that this is a difficult policy to develop. There have been costly failures in the past. The present system does not work effectively and there is no return from public investment in development. All shades of opinion share that position. The problem is whether the Bill will work. Most critics have not been critical of the principle that underlies the Bill but do not think that the Bill will work. That is why we are acting with such caution. This Bill does not implement these issues. It is a cautious approach requiring a degree of preparation. That is why we have this paving Bill.

Lord Radice: My Lords, I thank all my committee colleagues for their hard work and commitment in producing this report, which was the last of my four-year term as chairman of the sub-committee. In particular, I thank the noble Lord, Lord Maclennan of Rogart, who chaired a number of hearings with great distinction last summer when I was away from the House of Lords undergoing medical treatment. I also thank my noble friend Lord Grenfell, the chairman of the main EU committee, who has always given the work of Sub-Committee A every encouragement. I thank our special adviser, Professor Roger Levy, for his expert advice, and last, but certainly not least, I thank Edward Lock who was our clerk for this report, before he moved on to other pastures. While he was working for our committee, he proved himself to bea highly dedicated and intelligent servant of theHouse.
	As noble Lords can see from volume 2 of the report, we have drawn evidence from a variety of sources, including the UK Treasury; the UK Comptroller and Auditor General; the European Court of Auditors; the European Commissioner for Administrative Affairs, Audit and Anti-Fraud; the European Commission accounting officer; my noble friend Lord Kinnock, the former EU Commissioner; Marta Andreasen, the former Commission accounting officer; the European anti-fraud officer; Terry Wynn, then the chairman of the European Parliament's committee on budget control; and Ashley Mote, MEP. I thank all our witnesses for their evidence, both oral and written.
	Over the years, our sub-committee has taken a close and continuing interest in EU expenditure and its management. This report on financial management and fraud is on a topic that is of considerable importance not only to UK and other European taxpayers, but also to the overall reputation of the EU. If the citizens of the UK and other member states of the EU believe that European money is being fraudulently or inefficiently used, they are not likely to be very impressed by the European Union. On the other hand, I am sure that all noble Lords agree that it is important that any debates on these issues are founded on facts. Therefore, as well as finding a number of shortcomings in EU financial management and proposing significant changes in the way the EU handles its money affairs, our report also tries to put the debate about EU financial management into proper perspective.
	We start with the so-called statement of assurance from the European Court of Auditors. UnderArticle 248 of Maastricht Treaty, the European Court of Auditors is responsible for reporting on the legality and regularity of the EU's revenue and expenditure and for issuing a statement of assurance. As we point out in our report, since 1994, the Court of Auditors has not been able to give a positive statement of assurance on EU accounts. This is a serious matter; however, we should put the lack of a statement of assurance into context. I shall quote our own Comptroller and Auditor General, Sir John Bourn, who told us that were he required to issue a single statement of assurance on the UK Government's accounts in the same way as the Court of Auditors is for EU accounts, he would be unable to do so. He said that because he had to qualify 13 out of 500 accounts that represent the total expenditure of the UK central government. One of those accounts was that of the Department for Work and Pensions, whose budget is as big, if not bigger, than the whole EU budget.
	We do not argue that the ambition of issuing a single statement of assurance should now be dropped, but we believe that the Court of Auditors should, like the UK Comptroller and Auditor General, develop the practice of issuing statements on each spending area inside the EU. Here we note with approval that in 2004 the court was, for the first time, able to givea positive statement of assurance for agricultural payments, amounting to the majority of the EU budget under the integrated administration and control system.
	We also consider that a more accurate reflection of the substance of the court's annual audit would be achieved if the annual audit was more clearly separated from the statement of assurance. The noble Lord, Lord Williamson—who I am glad to see in our debate this evening—pointed out that every yearsince 1994 the Court of Auditors has certified thatthe accounts of the European Commission are reliable.
	There is the further point that the lack of a positive statement of assurance does not necessarily mean that there are high levels of fraudulent or corrupt transactions inside the EU, as is often claimed by the British media. Indeed, much of the coverage in the press suggests that there is a significant "culture of corruption" in Europe's institutions; yet our evidence—and I say this with firmness—has uncovered no such evidence to support that suggestion. Indeed, Marta Andreasen, who is one of the critics as noble Lords will know, made it clear to us that she did not make this charge about a culture of corruption.
	However, we cannot be complacent about fraud and mismanagement, even if the level of fraud in the EU is no higher than in comparable public expenditure programmes, including the United Kingdom—hence the need for improved financial management, especially at the level of the member state.
	I turn to the report's big idea, which is having national statements of assurance in each member state. We need to make sense of the system of shared management. That is to say, the shared responsibility that we have now between the Commission on the one hand and the member states under Article 274, which says that:
	"Member states shall co-operate with the Commission to ensure that the appropriations are used in accordance with the principles of sound financial management".
	It is significant that more than 80 per cent of European transactions, and most irregularities, take place within member states.
	We can all agree, surely, that it is unacceptable for Governments of member states to treat European money with less care than national funds, and we should also be concerned about the variability of control standards between member states. We are, therefore, as a committee, strongly in favour of a national statement of assurance on the European moneys disbursed in each member state. We have taken evidence on the Dutch pilot scheme. Under that scheme, the financial Minister issues an annual national statement on the use of European funds, subject to shared management in the Netherlands. The statement is then sent to the Dutch Parliament and the national Court of Auditors. The national statement and its corresponding audit are also sent to the Commission. I have to say that we, as a committee, are highly delighted that following the publication of our report on 7 November, the UK Government announced on 20 November their intention to provide an annual statement of the UK's use of EU funds. That statement will be audited to international standards by the National Audit Office. Both the statement and the audit will be presented to Parliament and then made available to the European Court of Auditors. We hope that other governments will follow suit, because that is absolutely vital. In this context, we do not consider that a national statement of assurance necessarily requires a political signature; it can be done like the Whitehall model through accounting officers and the Comptroller and Auditor General.
	Linked to a national statement of assurance in each member state, we need a robust system of naming and shaming. We support calls for the European Court of Auditors to produce a list of member states who are guilty of poor management of European funds. We consider that such a list would encourage member states to take financial management of European funds more seriously.
	I now turn to what we have to say about the Commission. Though, in our view, the main priority in European financial management improvement is to strengthen control and audit in member states, we need also to build on the recent changes in the Commission's accounting and audit systems, especially those introduced by the Prodi-Kinnock reforms. According to Brian Grey, the Commission's present accounting officer, the Commission now adheres to the International Federation of Accountants International Public Sector Accounting Standards, and the UK Treasury Economic Secretary Ed Balls has also welcomed the recent adoption by the Commission of accruals-based accounting, which he says has,
	"made the EU one of the leaders in public accounting terms".
	We also support the new four-stage system of authorisation and the segregation of authorisation and execution of payments introduced by the Prodi-Kinnock reforms, as well as the new decentralised system of management control.
	However, and I now turn to one of the points put to us by Marta Andreasen, there is a divergence of opinion about whether all Commission systems are consistent with double-entry bookkeeping. The present chief accounting officer says that they are; Marta Andreasen says that they are not. We say that all the accounting systems operating in the Commission should support double-entry accounting and call on the Commission to investigate this issue and publish a report.
	With respect to signing-off of accounts, we are strongly in favour of a system whereby responsibility for accounts is shouldered, first, by accountants and auditors in each directorate general and then at more senior levels, culminating with the signature either of the secretary-general, as we argue in this report, or, as the Treasury thinks is a better bet, the Commission's chief accountant.
	The European Commission has improved its performance on financial management, but, as it admits in its various recent reports, it needs to go much further. We suggest that in future issues arising from the Commission's accounting and audit system should be covered by the Court of Auditors in an annual report so that we can assess progress.
	Our committee has taken and will continue to take close interest in how the European Union's finances are managed, but we would also like to have regular debates on audit and management and on the UK's annual statement on the Floor of this House and in another place. I would like to have the Government's response on how they intend to promote an informed debate on these matters, because unless the citizens of the European Union and the UK know what is going on, they will be taken in by the kind of headlines that we see in our press. We conclude that the level of fraud is no higher than in comparable expenditure programmes. However, that does not mean to say that we should be complacent, and the fight against fraud must go on, especially, as we say, at member-state level.
	We applaud the efforts of the European Parliament, especially the budgetary committee; we welcome the recent reforms at Commission level; and we call on the European Council of Ministers, which, after all, represents the nation states, to take the issue far more seriously. European citizens, including UK citizens, need to be confident that European money is being efficiently and honestly spent. I believe that the Government's decision, following our report, to produce an annual statement of assurance is a breakthrough, and I hope that other member states will speedily follow their excellent example. I beg to move.
	Moved, That this House takes note of the report of the European Union Select Committee Financial Management and Fraud in the European Union: Perceptions, Facts and Proposals (50th Report, Session 2005—06, HL Paper 270).—(Lord Radice.)

Lord Inglewood: My Lords, in his opening remarks, the noble Lord, Lord Radice, thanked a number of those who have played a big part in the production of the report. I hope, as a member of that committee, that I might be allowed to add to that list. As chairman of the committee, he led us from the front with considerable panache and style. I certainly very much enjoyed working with him on it, as, I am sure, did other members of the committee. The extent and significance of the document must be clear to anyone listening to the debate, from the way in which he has described its principal contents. That is underscored by the fact that it has been quoted in a number of influential forums across Europe since its publication. Unlike the noble Lord, who covered almost the entire report, I shall focus on two separate parts of it.
	First, it is probably uncontroversial to say that the European Union is still a controversial topic in British political life. As the noble Lord pointed out, perhaps one of the most important reasons for this controversy is that it is felt by some—that feeling is certainly expressed by some—that financial corruption in the Union is, in essence, endemic. At the risk of stating the absolutely obvious, if that is true, it is an extremely serious allegation and about as serious a criticism of the European Union as it is possible to make.
	The report quite clearly shows two things. First—this is hardly surprising if one considers the experience of the member states—not everything is right in the garden. Because of that, a series of measures, a number of which are touched on in the report, is needed to improve the financial efficacy of the system that we know as the European Union. At the same time, however, it is equally true that there is no widespread, endemic corruption and bureaucracy. Indeed, as one of the witnesses said, it is really no better or worse than it is in the member states. This latter point is very important politically, because it is important to establish beyond serious argument that the United Kingdom has not hitched its wagon to something that is mired in the Augean stable of corruption, filth and depravity. That, in turn, is important, because it indicates the way in which we, in our country, should be trying to achieve reform. We are not trying to destroy the European Union: we in Britain should be trying to change it by moving it in the direction in which we want to go, as the leader of my party, the right honourable Member for Witney, is reported in the papers as having said in the past couple of days.
	I move from that general point to the role of the member states in the spending of European Union money, because, as the noble Lord, Lord Radice, said and as the report points out, something like 80 per cent of all European expenditure is disbursed in the member states by member state Governments, or by lower tiers of government or agencies in federal countries. As we discovered, in practice these are often de facto beyond the reach of European scrutiny, and often de jure, so far as I can see. If you think about it, this is a very serious shortcoming, which is why the report is quite clear that a way should be found in the member states for their national supreme audit institutions, and their parliaments, to take a serious part in the oversight of the disbursement and spending of European money within their own jurisdictions. As the noble Lord said, we were very interested by the evidence that was submitted to us of what is happening in Holland. Obviously I then welcome the thrust of the United Kingdom Government's response to the report: namely, that they intended to travel down the same road.
	If one thinks about it, it is startling that member states have hidden for so long behind their particular form of the doctrine of national sovereignty and subsidiarity, more or less completely to avoid addressing these issues. It seems particularly strange to me because, if I gave some money to a friend of mine to do something with it for me, there would be no suggestion other than that we had joint responsibility for it: it was my money, and he was responsible for it. As the noble Lord, Lord Radice, said, we came to a decision in the report about how a system of national statements of assurance might work. In fact, I went slightly further in my own mind, and tried to put my proposal to the committee. I was told that, as there was absolutely no evidence to support anything that I was proposing, it could not go into the report.
	That was fair enough. But I have been wondering, and I still wonder, whether, when the Commission prepares the accounts of the Union, it cannot with the benefit of computer technology break down into27 separate sections, member state by member state, the detail of the expenditure in each of the countries. After all, it should know. If that could be done, it would be possible for the supreme audit institutions of the member states to use the Commission's account as the basis of the investigations that they would carry out in their own countries. That would be a good idea if one could do it, because it is a way of tying the Commission into the member states. Currently, the Commission looks at much of the expenditure from a perspective that is decoupled from the processes outside its immediate horizon. If this could be done, perhaps in a way that was a slight variation of what I have described, the Commission's role in the process of disbursement would be more closely tied to the audit institutions in the member states.
	As the noble Lord, Lord Radice, intimated in his remarks, it is important that from here on both the European Union, particularly in the form of the Commission, and the member states accept that they have political and legal joint accountability, and, jointly and severally, are responsible for the money that they spend on the behalf of all of us, through their systems of administration. If we can embed that into the way in which the European Union actually works, we will take a major step towards dealing not only with the myths but with some of the real abuses of the system today.

Lord Williamson of Horton: My Lords, I very much welcome this thorough and wide-ranging report from the European Union Committee, which resulted from the inquiry by its Sub-Committee A, and I congratulate its chairman and members. As is customary, I declare an interest in that, although I spent a greater part of my career in the British public service, I was also for some time an official of the European Commission. The noble Lord, Lord Pearson of Rannoch, will be glad to know that I have a well deserved pension. The committee is right to seek to indicate practical ways in which the financial management of European funds can be improved, and to note, as it shows in paragraph 148 of the report, that the Commission and the European Parliament are actively addressing financial management issues raised by the Court of Auditors in its annual audits. This, of course, deserves full attention.
	I select from this wide-ranging report a number of key points and recommendations with which I strongly agree. First, I believe that the European Union Committee gives good advice when it states in paragraph 146that,
	"a more accurate refection of the substance of the Court's annual audit and the Statement of Assurance would be achieved if these two functions were more clearly separated. In addition, the single Statement of Assurance should be split into a series of statements on each of the different spending categories".
	This is in practice what we do here, since the Comptroller and Auditor-General deals with departments and accounts separately and does not seek to give a single statement of assurance on government accounts as a whole.
	In short, the EU Committee's recommendation would ensure that the annual audit of all revenue and expenditure of the Commission would be separated from the broader objectives of the statement of assurance. It should more accurately indicate where any irregularities might exist. It would also provide a better basis for a more accurate and more balanced presentation to the European public by the media.
	Secondly, I note and I was surprised to see in paragraph 151 the committee's conclusion that, because of the small number of transactions actually looked at each year, the court's methodology cannot lead to an accurate picture of financial management. I am not able to judge this, but the Court of Auditors is a highly responsible European institution and I am sure that it will examine this conclusion carefully.
	Thirdly, because of the large percentage of European expenditure which is paid out in member states, as already indicated by noble Lords who have spoken, I welcome the closer co-operation between the Court of Auditors and the audit institutions in the member states. I would not see any objection to a supervisory role for the Court of Auditors over the auditing of European expenditure in the member states, but I note that the Government do not agree because of the accountability of national audit authorities to national parliaments. I should say to the Minister that I strongly welcome the Government's recent decision that there should be a statement of assurance by the UK Government. That is a very good step forward and a lesson to everyone other than the Dutch who have done it already.
	More generally, I wish to emphasise, as I did in evidence to the committee, that it is a matter of concern that much comment in the UK on European Union accounts and expenditure is often on the lines that that part of expenditure which has not received a statement of assurance from the Court of Auditors is expenditure lost by fraud or corruption, which is of course completely wrong. I am glad that the committee's report and the Government's reply, while rightly stressing the importance of action against any fraud, make that point clearly. The removal of that misunderstanding is long overdue. The Court of Auditors does not work like a private auditor certifying the accounts of a public or private company. First, it tracks all errors—important or not—with or without a financial impact. Secondly, it cannot give a statement of assurance in some cases where it does not have the full information, but without implying that these cases involve fraud or corruption. Thirdly, it does not take account—nor does much British opinion take account—of the fact that the Commission claims back in later financial years following errors by member states a considerable amount of money; for example, about €400 million on agriculture recently and €518 million on certain public work contracts for 2000-04. Those noble Lords who have dealt with European affairs know that those claims for huge amounts of money give rise to serious difficulties in the Council of Ministers, which are much greater than some of the other issues that we are talking about today.
	The committee points out tellingly that the Comptroller and Auditor-General stated that he would not have been able to give a statement of assurance on the UK Government's accounts because he qualified a number of them. But that does not imply that all the problems in the UK were due to fraud or corruption—it is the same basic point. Administrative mistakes are almost bound to occur in many public administrations. You cannot rule that out.
	In addition to this general point, which is absolutely vital to remove the long-running misunderstanding here, I stress that in its 2004 report, the Court of Auditors certified, subject to one point now covered by the introduction of the accrual accounts, that the accounts of the European Commission are reliable. I believe that this is the 11th year in a row that the court has given a positive declaration on the Commission's accounts; that is, every year since it was required to make a statement of assurance. The court also gave a positive declaration on all revenue expenditure and all administrative expenditure of the Commission—there is a lot of misunderstanding on that point also. On the administrative expenditure of the Commission, there has been a positive declaration by the Court of Auditors.
	The court gave a positive declaration on important elements of the expenditure largely made by or in the member states—namely, the pre-accession aid, which is difficult to operate, the European Development Fund and a large part of agricultural spending. That latter point was because of the efficient working, which I understand the Government support, of the European Union's fairly new Integrated Administration and Control System. That is a good system and I ask the Minister to let us know whether it continues to be extended over a wider area of agriculture expenditure. It covers quite a lot already. In conclusion, I express a strong hope that the committee's report will help to deal with the real issues and will contribute to burying unjustified references to fraud and corruption.

Lord Pearson of Rannoch: My Lords, given the composition of the committee of your Lordships' House which wrote this report, I suppose we should not be too shocked that it has produced such a masterpiece—a masterpiece of Euro-philiac forgiveness of the sins of their beloved project of European integration. I pointed out the continuing problem of the heavily biased membership of our European Select Committees when the House approved it at the start of this Session. If we look at the Select Committee which validated this unfortunate report, we detect only one reasonably sound Euro-sceptic and one rather pallid imitation out of the 18 Peers who sit on it. As far as I am aware, nearly all the other 16 are among the most ardent Euro-philes in your Lordships' House, including the chairman, for whom I have much personal affection. Sub-Committee A, which produced this report, follows the same pattern with only one Euro-sceptic out of its 10 members and a Euro-phile chairman. I fear that all other sub-committees are the same.
	That being so, it is not surprising that the report does its best to excuse the inexcusable and to wander round all over the place without pinning the blame for the EU's financial shambles firmly where it belongs; that is, with the European Commission in Brussels. I say that the Commission is responsible because that is the legal position under the Treaty establishing the European Community, principally under Article 274 thereof. I know that it is wearisome, but I fear that I should quote the relevant extract. Article 274 states that,
	"the Commission shall implement the budget ... on its own responsibility ... having regard to the principles of sound financial management. Member States shall cooperate with the Commission to ensure that the appropriations are used in accordance with the principles of sound financial management".
	There are several other clauses in this part of the treaty which confirm this position. I would think that that seems clear enough, as I trust your Lordships will agree. The rules concerning the responsibility of financial controllers and authorising and accounting officers derive their authority from Article 279 and give prime responsibility to the chief accounting officer—Marta Andreasen that was, and Mr Brian Gray now.
	The Commission's powers extend to withholding the money from member states if it is not satisfied that they are using it properly, so it really is in the driving seat. It could, for instance, insist on an independent audit of any recipient country's expenditure, and it could insist that that country's Prime Minister—or head of Treasury, or whoever—signed off for it. But no, that would not be the communautaire way of doing things: no one signs off for anything, not even the chief accounting officer. How long would a public company last in the real world if the directors refused to sign the accounts? How long would it last if its own internal auditors refused to give it a clean bill of health—there is no such thing as an external audit of any EU institution, a point I shall come back to later—not even for one year, and certainly not for the 12 years which is the EU's proud record? Let us be in no doubt that the responsibility for this amazing state of affairs lies firmly with the Commission.
	I have mentioned Marta Andreasen, who gave evidence to the committee, and I believe that my noble friend Lord Willoughby de Broke will be addressing some of his remarks to her case. But I want briefly to record my admiration for this honourable and courageous lady who, for her honesty in refusing to sign the EU's obviously bogus 2001 accounts, was sacked and treated with contempt by the European Union. She has been defamed under privilege in your Lordships' sub-committee by the man most responsible for her treatment, the noble Lord, Lord Kinnock, who I am sorry but not surprised to see is not in his place.

Lord Pearson of Rannoch: My Lords, I accept that, but it is still a great pity that he is not here in person.
	I shall go on about the tribulations of Mrs Andreasen. Her case for wrongful dismissal is dragging interminably through the Luxembourg court and she, for all these pains, is unable to find another job. No one wants to irritate the corrupt and powerful beast in Brussels, do they? In voicing this support for Mrs Andreasen, perhaps I may also ask the chairman of the sub-committee, the noble Lord, Lord Radice, why her supplementary memorandum, submitted in correction of the misleading and damaging evidence given by the noble Lord, Lord Kinnock, was not printed with the report? If it is true that a Clerk lost her e-mail, sent in before the end of July and after the evidence of the noble Lord, Lord Kinnock, on 25 July, why could it not have been included with the evidence instead of being referred to in a footnote on page 113? If the footnote could be printed, why not the memo? Why was it made available only in hard copy upon application to the Clerk? Why was it not even available on e-mail? I shall put a copy of the memorandum in question in the Library of the House and will assume, unless I am contradicted, that anyone who wants a copy can get one electronically from cookaj@parliament.uk—who, incidentally, is not the Clerk who lost the original. This is a very important document. Not only does it put Mrs Andreasen's side of the case made so improperly against her; but, in doing so, it corrects many of the wider misapprehensions of the committee, which it has set down in its report. If I may, I shall also give a copy to the Minister after the debate.
	And so to the malodorous meat of the report itself. As I am not a chartered accountant, I have been guided in what I am about to say by some eminent practitioners in the field, principally Mr Andrew Hamilton FCA, who heads up his own successful practice in Edinburgh, and Mr Hugh Williams FCA, who has also published widely and is a senior partner of an award-winning firm in Plymouth. They have advised me to concentrate in the time available on one particular accounting matter in order to demonstrate the seriousness of the situation in Brussels and thus the inadequacy of the committee's report. So I will pass in unaccustomed and frustrated silence over the lack of respect for standard accounting principles such as double-entry bookkeeping and accrual accounting; the lack of security in the accounting system; poor internal controls with no one taking responsibility for sound financial management, with the chief accounting officer not even signing off the accounts; failings with the budgets; risks with advance payments; and the whole system wide open to fraud. No, I will resist all that and concentrate instead on the small matter of what has happened to €28 billion.
	I am indebted to Mr Hamilton for raising this interesting question after he manfully struggled through the 139 pages of the Commission's annual accounts for 2005 together with the accompanying 228 pages of the Court of Auditors' negative report. The experience made him an immediate and avid devotee of Marta Andreasen, of course, and his discoveries brought him to the attention of that great Euro-sceptic luminary, Mr Christopher Booker of the Sunday Telegraph. On 28 January this year Mr Booker duly wrote in his column about Mr Hamilton's analysis:
	"Although the Commission's operating revenue for 2005 was given, with implausible precision, as €107,890,098,965.56, it was impossible to discover where most of this money had come from or gone to, because the accounts do not use the double-entry system used by every corner shop. They are just a maze of meaningless figures. For instance, a figure for the EU's 'long-term and short-term pre-financing' suddenly goes up from zero to €28 billion without explanation".
	This version of events was too much for Mr Brian Gray, the successor to Mrs Andreasen and the Commission's present chief accounting officer. Incidentally, he moved up from being the head of the Commission's two biggest spending departments, agriculture and regional aid. Mr Gray fired back a letter to the Sunday Telegraph on 4 February thus:
	"Long and short term pre-financing have not 'shot up' from zero to €28 billion. Since 2005 the EU's balance sheet has had a different format to take account of the move from cash-based to accrual-based accounting standards, in line with the way British authorities now record their own financial situation".
	Mr Hamilton, Mr Williams and their accounting fraternity generally just could not believe this. Together with 12 other high-powered accountants and lawyers, they replied to Mr Gray as follows in the Sunday Telegraph of 11 February:
	"As experienced chartered accountants and lawyers, we are amazed by the letter from Mr Brian Gray, the European Commission's chief accountant, defending the EU's accounting system. On what planet is he living when he claims that for the past 12 years the EU's accounts have been given a clean bill of health? What does he not understand about the 2005 Court of Auditors' 228-page audit report which explains in minute detail all the errors, mistakes and irregularities of which the Commission are guilty?
	"On the matter of the €28 billion omitted from the 2004 accounts, Mr Gray attributes this to a change of accounting policy (from cash to accruals). Begging his pardon, but he is either incompetent or disingenuous. The €28 billion pre-financing sum should have been recorded as a €28 billion asset in the 2004 Commission accounts regardless of which accounting system was in operation. The very fact that it was not recorded as a cash-related asset in the 2004 accounts gives the lie to Mr Gray's claim that, 'The EU's general accounts have always been double-entry'. Small wonder that the Court of Auditors continues to have no faith in the EC accounts".
	As I said, this was signed by 14 eminent chartered accountants and lawyers, and we have heard nothing more from Mr Gray.
	The questions my accountant friends would like me to put through the Government to the Commission are these. The UK sends many billions of pounds every year to Brussels, so I would have thought that the Government are entitled to some form of answer, particularly when the Commission's 2004 balance sheet has been understated by some 25 per cent. It has nothing to do with a change in accounting policy, but is just a typical example of the EU's complete disregard for financial probity.
	The first question is this. Why was the €28 billion pre-financing figure not recorded as an asset in the Commission's 2004 accounts? After all, it was cash. Secondly, in the absence of a double-entry system to record pre-financing charges, how do we know that the figure is €28 billion and not, shall we say, 28 cents? Thirdly, is it true that the pre-financing figures are collected by means of a spreadsheet for completion by the member states themselves, and if so, who checks the figures? Fourthly, are these figures reconciled by the Commission to their own accounting records, and if not, why not? Fifthly, why has Mr Brian Gray, the Commission's chief accountant, said publicly thatthe €28 billion pre-financing figure was excluded from the Commission's 2004 accounts because it was not cash? Surely if anyone should know that pre-financing charges are de facto cash, it should be the chief accountant.
	I am sorry to direct these questions to the Minister, who cannot be held responsible for this report, but he is a member of a Government who continue to support our subservience to Brussels through our membership of the European Union—very expensive subservience, too.
	I conclude with one suggestion for Her Majesty's Government. Surely it must by now be obvious that the Commission and other EU institutions are not going to do anything to sort out the ongoing accounting shambles and vulnerability to fraud. They have been promising to do so for a long time, but nothing has been done. I remember Mr Kenneth Clarke, when Chancellor of the Exchequer some 14 years ago, coming before your Lordships' Select Committee, upon which I then sat, and assuring us that all these problems—which were the same then as now—would be sorted out by a new miracle figure, a Mr Schmidhuber. But, of course, they were not. The will simply is not there; it is all too comfortable.
	We should also not forget that, despite the Eurocrats' best attempts thorough multi-million euro propaganda campaigns in schools and across the continent of Europe, there is still no European demos, and there will not be for any time to come. Thus there can be no European democracy to hold the freeloaders to account, and so the system rolls on regardless. But people do not feel strongly enough to protest, and anyway they have no influence in appointing or dismissing the principal villains, who are the Commission.
	My suggestion is simply that the Government should insist that one of the larger firms of international chartered accountants should be given the task of sorting the whole thing out. Of course the Commission would refuse such an idea, but if the Government got together with one or two other member states that were large donors to the EU and refused to send any more money until such a firm had been appointed, I fancy that would have the desired effect. I look forward to the Minister's reaction to this idea.

Lord Giddens: My Lords, I only recently became a member of this sub-committee, after this report was written, so I think it is okay for me to congratulate my noble friend Lord Radice on it. In contrast to the previous speaker I find the report scrupulous, detailed and important. As we know, the EU budget is only a tiny proportion of the GDP of member states, but when spent, as the report notes, it can amount to very large sums indeed.
	There are quite a lot of jokes about this topic, and it is probably not wise to tell a joke to such a small audience as this, but I will have a go anyway. Europhobes might actually like this joke, so maybe I could expect a laugh from the other side. There are these two wealthy businessmen, and they are talking about how they have made their fortunes from EU funds. One is from western Europe, and the other is from what used to be eastern Europe. The one from western Europe takes his friend to his country and says, "You see that stretch of road? I got €10 million to fund that, and it only cost €5 million to build. You go figure the implications". Then the one from eastern Europe takes his friend to his country and says, "You see that road?". The one from western Europe says, "What road?"—because there is no road there. The guy from eastern Europe says, "I got €10 million in EU funds to construct that road. You go figure the implications".
	Unlike the previous speaker, I have no quarrel with most of this report. I shall make five brief comments upon it. First, it is surely right to say that the current state of audit of the EU budget is a serious problem. It is regularly used, as we can see from the previous speech, by those who seek to bash the EU. The issues are well put in the Treasury's memorandum of evidence in the second volume of the report, where it says that the audit methodology is very precise and hence it tends to be used as a negative assessment—in other words, as the memorandum says, the bar has been set very high by the European Union. The memorandum also says something more qualified: the quality of financial management is consistently not good enough. We have to ask why that should be so.
	Secondly, however, as the report correctly indicates and previous speakers have noted, the major difficulties happen at the level of member states, since most of the funds are allocated to, and spent by, them. I would see the issue here as a bit like that of the Lisbon agenda as it relates to the structural issue of the European Union. You have the European Commission, which is nominally the government of Europe, but a lot of what the Commission wants to do is determined by powers that remain in the hands of the member nations. I will come back to that in a minute.
	Thirdly, I am not sure whether I should say this, but I only got my job as director of the LSE because the Comptroller and Auditor General, Sir John Bourn, decided he did not want it. Maybe he did not want to face all the fractious academics you have to deal with. Anyway, it is interesting that, as was previously mentioned, he says that he could not have signed off our national accounts using this system—again, surely an expression of the fact that the bar has been set very high. I find his comment interesting. He says:
	"By setting a test which is so high, when you explain or put this out publicly, people feel how hopeless it all is".
	It is not all hopeless, but it is part of the same point. The EU has got itself into a bit of a bind, because I do not see how it could possibly relax its auditing procedures now.
	Fourthly, I fear that that latter point might apply to the suggestion in the report that the audit of revenue and expenditure be separated from the statement of assurance. That seems a sensible proposal, but it could be taken as something of a weakening of the strict rules the EU has set itself.
	Fifthly, since many of the problems are concentrated at member-state level, it is surely right to place a great deal of emphasis on tightening up at that level. Again, maybe the way forward is a bit like the Lisbon agenda. As we know, the agenda has not worked too well, partly because the Commission does not have the capability of fully controlling the policies that member nations institute. In recent publications about the Lisbon agenda, countries—and the European Union as a whole—are much closer now to meeting the agenda's objectives than seemed possible two or three years ago. That is because member states have taken the initiative into their own hands and some have served as active models for others. That is also the way forward for this issue.
	The report mentions that the Dutch Government are producing their own statement of assurance. Since the report was written, the Netherlands has been joined by Sweden and Denmark, who will do the same thing—that was announced recently on 27 February. It makes sense for the Dutch to pilot a scheme that others could follow in conjunction with other member states. Like the Lisbon agenda, this might be more successful as a bottom-up rather than a top-down exercise.
	I am not sure whether my joke got a laugh from the other side of the House, but fraud is the most difficult issue in all this. I am not sure how the EU can be confident that fraud amounts to only 0.3 per cent of total expenditure, as was said. We know that the EU does not have the data to allow it to make such a precise statement. Commissioner Kallas says that,
	"fraud has not penetrated the European budget".
	That may be true, but nothing in this report and nothing in his evidence shows that to be the case. Since estimates of fraud depend on the self-reporting of member states, there is still a lot to do. Resistance to more rigorous pan-European measures is strong among nation states, but it must come. At the end of the report, the commissioner makes a clear distinction between irregularity and fraud, but I am not sure that the distinction is so clear. He says that these two are very different, but I would have thought that there was a fair amount of merging around the edges.
	An interesting point was made quite well by one of the witnesses, Mr Wynn, on delegation risk: if you think that funds are not just yours but that they come from the European Union, you may tend to treat them in a somewhat less scrupulous way than funds that you have generated yourself. That is a point worth reckoning. We have to ensure that member states treat EU funds as being every bit as important as funds those they generate themselves.
	On delegation risk, one might quote the celebrated statement of the economist Larry Summers, which is an example of the same thing. He said:
	"In the history of the world, no-one has ever washed a rented car".

Lord Willoughby de Broke: My Lords, had I wanted to use any whitewash to clean the stables on my farm, I would have found it difficult, because I fear that most of the national stock has been used up by this report. Its principal aim seemed to be to show that if the Commission's accounts have been qualified for the past 12 years, it is not because of any failing in the accounts or in the Commission's procedures, but rather the remit of the Court of Auditors. So the message is, if not shoot the messenger, at least change the message to avoid unpleasant questions about the Commission's financial competence—what the report is pleased to label,
	"the sporadic and sometimes capricious way ... this issue is debated ... and discussed in the press".
	I know that it is considered bad taste in this House to be rude about the EU, but I wonder why it is capricious to ask whether it makes sense to give£14 billion a year every year to an organisation that has failed its audit test 12 years in succession. I was struck by the words "sporadic" and "capricious" because the report itself could have that accusation levelled at it. At the very least, it has been selective in ignoring evidence that does not fit with its apparent desire to pour oil, in this case, rather than whitewash on the troubled waters of the EU accounts.
	I begin with an example that my noble friend Lord Inglewood and the noble Lord, Lord Williamson, touched on. In its summary of conclusions at paragraph 160, the report concludes that no,
	"evidence supports the allegation that there is a significant element of corruption within the Commission".
	I think that that refers to the evidence given by Ashley Mote MEP. Mr Mote actually said that there was a significant element of corruption, not within the Commission itself, but within its administration. He went on to give detailed factual evidence about the fraud at the heart of the Eurostat scam—the 2003 Eurostat scandal, the subject of internal investigation by OLAF, which has yet to result in a single prosecution.

Lord Willoughby de Broke: My Lords, I understand that, but OLAF has a duty to report to the member states, and still no prosecution has followed. Is the noble Lord happy with the fact that no prosecutions have followed the Eurostat scam? I do not know whether he is, but I do not think that it is very good. There is no internal audit control, which is why OLAF could not work out how big the scam was or who had done it. It is completely hopeless.
	It is worth reminding the House, while I am on this subject, that in 1999 the whole Commission had to resign precisely because of what were euphemistically termed financial irregularities. I agree with the noble Lord, Lord Giddens, when he asks when a financial irregularity becomes a fraud. The two are very close cousins. The whole sorry Eurostat episode, four years after the Commission resigned, shows that nothing has really changed since then, in spite of the so-called reforms—an inconvenient truth that was conveniently omitted from the report.
	I move on to more inconvenient truths which appear to have been capriciously overlooked. Amazingly, it was not until 2002 that the Commission felt it necessary to employ a qualified accountant as chief accounting officer. This was Marta Andreasen, who has already been mentioned by my noble friend Lord Pearson, who gave evidence to the committee. Mrs Andreasen has an impressive CV and was working as accountant for the OECD when she was appointed by the Commission as chief accounting officer. What she found appalled her: a spaghetti bolognese of untraceable payments and bank accounts with no proper controls or signatories. She asked for the implementation of a double-entry book-keeping system, a coherent, secure computer system and an independent treasury audit. Unsurprisingly, she refused to sign the 2001 accounts because she considered them unreliable. Her aim was always, as stated in a letter to the committee,
	"to help resolve the fundamental failures of the EU budget management in an effort to achieve the welfare of the European Union as well as the protection of European citizens' interest".
	Whatever our views on the EU, we could at least agree on that; but her reward was to be suspended by a fax from the then Mr Kinnock—the now noble Lord, Lord Kinnock—and removed from her post after only five months.
	Mrs Andreasen gave very convincing evidence to the committee on 11 July last year. It was, I suppose, not surprising but none the less deeply disappointing that when the noble Lord, Lord Kinnock, appeared before the committee on 25 July he made incorrect and misleading statements about Mrs Andreasenand her evidence. In question 468, he stated thatMrs Andreasen had made no complaint about the way he had conducted the procedures relating to her and her position in the Commission. That is quite untrue; her appeal against dismissal currently before the courts is precisely because of unfair procedure—procedure led by the then Mr Kinnock.
	Mr Kinnock went on to charge at question 469 that Mrs Andreasen had not been employed by the OECD when she applied for the position of chief accounting officer; in other words, that she had falsified her CV. This defamatory statement is also untrue; Mrs Andreasen was an official at the OECD at that time, and was so certified by the OECD on 14 November 2001. I have a copy of that certificate myself—as, I believe, does the clerk to the committee. The noble Lord, Lord Kinnock, went on to pretend that Mrs Andreasen was not a high-calibre candidate, making a bogus point about linguistic requirements and adding that her pay was anyway only about €80,000 a year. But what was the Commission thinking about, anyway, if it was not trying to employ a high-calibre candidate? The reality is that Mrs Andreasen was a highly qualified, multilingual candidate. Her pay was not €80,000 but about £180,000, or some €260,000, a salary that would attract a high-quality candidate anywhere in Europe or the UK.
	Like my noble friend, I am sorry that the noble Lord, Lord Kinnock, is not here to correct the misleading and defamatory statements that he made aboutMrs Andreasen, and I hope that he takes the opportunity to do so as soon as possible. Mrs Andreasen is still waiting for justice, nearly five years after her removal; her career is in a state of enforced suspension—all for trying to do the job for which she was hired.

Lord Willoughby de Broke: My Lords, I believe that she is still in receipt of part of her salary. Some of these matters are sub judice and I am not sure of the exact position either as regards her salary or her pension. If the noble Lord wishes to find out the exact position, he should write to Ms Andreasen.
	As I say, the fate of all whistleblowers in the Brussels set-up is to be vilified, whether it be Bernard Connolly, Martin van Buitenen, Jose Sequeira or the investigative journalist, Hans-Peter Tillack. They get sacked, threatened and prosecuted—in Mr Sequeira's case, till they are probably mad—meanwhile in the Commission the band plays on.
	Like my noble friend Lord Pearson, I hope thatthe noble Lord, Lord Radice, will explain whyMs Andreasen's rebuttal of the statements of the noble Lord, Lord Kinnock, was not included in the report. They certainly—

Lord Willoughby de Broke: My Lords, I amsorry that the noble Lord feels like that. After all,Ms Andreasen was the Commission's chief accounting officer and her views should be properly taken account of. Her original evidence was not just misinterpreted but was said by a member of the committee to be inaccurate. It was not inaccurate; she has an absolute right to reply to that. It should be made public so that those who read the report have the opportunity to decide who to believe—the noble Lord, Lord Kinnock, or Ms Andreasen. Anyway, that evidence is not in the report but I hope that it will be made available for people who want to read it as it is very important.
	I repeat that I am disappointed in the report. It seems to want to make it easier for the Court of Auditors to give a positive statement of assurance—principally, it seems, by redefining "fraud" and "irregularity", as the noble Lord, Lord Giddens, mentioned. It accepts the Commission's excuse that member states are to blame for billions disappearing into thin air, and supports its so-called "roadmap" to formalise the process of making member states more responsible. But, as my noble friend pointed out, the responsibility to do that is clearly laid on the Commission in Article 274. Under the Maastricht Treaty, that responsibility is the Commission's; it has both the responsibility and the power, but unfortunately seems to lack the will.
	I fear that the situation will not improve while EU officials remain in a permanent state of denial on the reliability of the accounts. All we get are promises and window-dressing. I hope that they will follow up the suggestion made that a reputable firm of international accountants should be contracted to examine the accounts on behalf of the European Commission. Then at least the taxpayers might have some confidence that their money is not being wasted and disappearing into enormous black holes, as is the case at the moment—witness the 12th qualified audit by the Court of Auditors.

Lord Stoddart of Swindon: My Lords, I thank the committee for its report and the noble Lord, Lord Radice, for the manner in which he presented it to the House. However, in spite of finding no evidence of a culture of corruption in the EU, I am afraid that the report will not dispel the deep-rooted conviction that fraud is endemic in the EU and costs about £2 billion a year.
	This evening, two noble Lords stated that the idea that fraud does not exist is not acceptable. Indeed, the report is altogether too kind to the Commission and gives little or no credit to people who have sought to bring its failings to public attention. That especially applies, as we have heard, to Marta Andreasen, whose Sovietesque treatment by the Commission is to be deplored.
	In my view, the committee accepts too easily the notion that the problems are ones of irregularity rather than fraud. It also gives too much credence to the repeated assertion by the Commission that it is all the fault of the nation states rather than itself. As we have heard, the responsibility to order the accounts—and supervise expenditure for which it is responsible—lies not with the nation states but with the Commission.
	That cop-out really cannot be accepted, particularly by the United Kingdom because it is, and will remain, the second largest contributor to the EU budget in both gross and net terms. For us, fraud and lax administration is a serious matter—but for the net beneficiaries it is probably looked at in a completely different light. As far as they are concerned the "easy come, easy go" syndrome might well operate, as the noble Lord, Lord Giddens, said. So, for the United Kingdom, which is and has been the milch cow of Europe ever since we joined, it is therefore essential that the Commission stringently controls the EU finances. I come back to that, because it needs emphasising time and time again.
	To emphasise that point further, I remind your Lordships that in 2005 the United Kingdom made a gross annual payment to the EU of £15 billion, and a net contribution of £6.1 billion. The new seven-year financial settlement will further increase those figures; indeed, if Britain's rebate is removed in 2009, our contribution will rocket to around £10 billion net per annum. That is very serious money, and our taxpayers have the right to expect that it will be properly spent. In addition, there are funds like overseas development, 33 per cent of which are administered—badly, I might say—by the European Union.
	So, we are really thinking about huge sums of money being paid not by the British Government but by British taxpayers: it is their money and, as we have heard from the newspapers today, some people are paying 50 per cent of their salaries in tax. They do not want to see it wasted and are therefore entitled to an assurance that all of their money is being properly used, and that none of it is being fraudulently converted by persons or organisations within or outside the EU.
	There appear to be no sanctions available against the Commission for neglect or mishandling of the finances, or anything else for that matter. Yet British taxpayers are being fined by the Commission for Defra's mistakes and faulty administration in the single farm payment scheme. Apparently, that fine will amount to £305 million—that is £5 for every man, woman and child in the country, or £10 for every worker. They have a right to be resentful that we should be fined in this way.
	It is outrageous that British taxpayers should be made to pay fines in respect of the failure of government departments over which they have no control by a gaggle of appointed commissars who are immune from such sanctions. Why on earth the House of Commons, which has to raise that money, accepts such an imposition with hardly a word of protest is completely beyond my comprehension. If I were still there, I would be rattling Early Day Motions around the place, and I am sure that a lot of people would be very happy to sign them.
	The report makes a number of useful recommendations, including the one dealing with the need to establish double-entry bookkeeping in the EU's accounting systems. It seems incredible that the accounting system has been in operation for 50 years without double-entry bookkeeping, yet we are forever being told that the EU is a very efficient and progressive operation. There are other useful suggestions with which I agree very much, including the signing-off of accounts by officials, value-for-money audits and the necessity for the Council and national parliaments to adopt a more structured system of considering and debating the accounts of the European Union. I sincerely hope that they will be implemented, but how far those recommendations will be accepted and implemented by the Commission, we simply do not know.
	Pressure on the Commission to put its financial house in order should be maintained, so that taxpayers in this country and throughout the EU can be assured that no part of their imposts are fraudulently converted or not well managed. It may very well be the case that, as was suggested by the noble Lord, Lord Pearson, the Commission should employ an international firm of accountants, either to examine its accounts or even to run its financial affairs.

Lord Tomlinson: My Lords, I begin by thanking the noble Lord, Lord Radice, and his committee for what I think is an excellent report. It goes without saying that I substantially agreed with the speeches of the noble Lords, Lord Inglewood, Lord Williamson and Lord Giddens. Therefore, I shall concentrate my opening remarks on the three other speeches with which I have substantial disagreement. I have to say to the noble Lords, Lord Pearson, Lord Willoughby de Broke and Lord Stoddart, that no 1 per cent of European Union gross domestic product is more analysed, more scrutinised and more verified in terms of expenditure than the 1 per cent of European Union GDP that makes up the European Union budget.
	If the noble Lord, Lord Pearson, were critical of the evidence, where was his? Where was UKIP's evidence? It had a full opportunity to give to the committee all the evidence to which it complains no-one ever listens, but that evidence was not put before the committee. There were one or two feeble questions from the sidelines, particularly in defence of the person who appears to be the latest patron saint of UKIP, Marta Andreasen. I have no doubt that the noble Lord, Lord Kinnock, was absolutely correct to say that there were errors in her CV that did notfully reflect her past employment and that therewas substantial evidence of a breakdown of relationships between her and the director-general of budgets.

Lord Tomlinson: My Lords, I have said what I have to say and I am not getting into a debate with the noble Lord about the detail of that. However, when people like the noble Lords, Lord Willoughby de Broke and Lord Pearson of Rannoch, rant on about "refusing to sign the accounts" and "refusing to give a clean bill of health", those are not proper and accurate descriptions of the process required by the Maastricht Treaty. The treaty requires two things. First, it clearly requires a statement about the accuracy of the accounts, and the accuracy of the accounts has been attested every single year. Secondly, it requires a statement about the regularity of the underlying transactions. That has not been given, and Sir John Bourn, our own Comptroller and Auditor General, said that he would not be able to give such a statement in relation to the United Kingdom's accounts were he required to do so on the same basis as that required by the European Court of Auditors.

Lord Tomlinson: My Lords, patience is a virtue. If the noble Lord seeks to control himself, he might be rewarded with the answers as I develop my speech.
	I believe that this report, for which I am grateful to my noble friend Lord Radice and his committee, should have laid to rest— I doubt that it will have done—some of the favourite mythology of Euro-sceptics. There are two very important quotations: the one from Sir John Bourn and another which reads:
	"We have been presented with no evidence to support allegations of a culture of corruption within the Commission's administration".
	So there is also very important evidence about the work of OLAF. I notice that we did not hear too much from some of the UKIP members about OLAF. That might be because OLAF is currently engaged in investigating allegations of fraud by one of UKIP's members in the European Parliament. I am glad to say that, albeit belatedly and somewhat reluctantly, UKIP was forced by the pressure of public opinion to suspend that member from its party, thus reducing its membership by a substantial proportion.
	However, the British deputy director of OLAF,Mr Nick Ilett, is quoted at paragraph 136 of the report as saying that he is,
	"happy that most of the cases which [OLAF] refer[s] to national jurisdictions lead to prosecutions".
	The chairman of the OLAF supervisory board—again, a Brit—Ms Rosalind Wright QC, said that it was pretty impressive that three out of four of the OLAF fraud reports reached trial. So, where there is fraud or corruption, there is evidence that it is tackled seriously.
	These introductory remarks should not be taken or interpreted as complacent acceptance of the status quo being satisfactory, but merely as a warning about those false prophets who see everything in our garden as perfect and everything European as tainted—those whose approach to the European Union is almost xenophobic. There are things that are wrong and things that need to change. Many of those are detailed with admirable clarity in the report of your Lordships' European Union Committee.
	Let us look at some of the things that need to change. First, clearly there must be a proper differentiation between fraud and irregularity. One can be a mistake; the other has to have deliberate intention of defrauding the taxpayer. It is no longer satisfactory that fraud and irregularity should be bundled together under a single category. They have to be separated and separately treated.
	Secondly, the transaction-testing method for looking at the underlying transactions requires only a small number of transactions in the sample. When you extrapolate from a small sample, you can frequently get exaggerated results. I believe that there is a need for a definitive study including national administrations of the statement of assurance statistical methodology.
	Thirdly, the statement of assurance needs to be disaggregated, as the committee made absolutely clear, into appropriate separate areas of the budget—agriculture, structural funds, energy, research and development, development aid, and administration. Fourthly, in relation to the statement of assurance, the member states who are jointly responsible and who administer between 80 and 85 per cent of the total budget need to have their responsibilities checked and integrated into a system of statements of assurance. All those things are abundantly sensible, pragmatic reforms that show anything but a complacent satisfaction with the status quo.
	Fifthly, member states must be scrupulous in controlling the efficiency and propriety of the spending of EU money as we expect them to be with our own. Sixthly, there should be a comment by the Court of Auditors on the capacity of each member state properly to fulfil their responsibilities for European expenditure.
	I want to turn briefly to a couple of things that are not in the report. There are other problems in fraud and financial management that need to be addressed urgently. First, on the revenue side of the budget, the system of traditional own resources needs to be looked at very thoroughly. It is inefficient because it is a declining share of the budget. It is difficult and costly to collect and we are currently having to pay member states an inducement fee of about 20 per cent of their own resources that they collect to encourage them to collect them at the margin. Of course, that sort of system is fraud-prone. We need to spend at least as much time concerning ourselves with fraud in revenue collection as with fraud and irregularity in expenditure.
	Nowhere is that more evident than in the transit system of the European Union where goods that enter the European Union at our external frontiers have their taxation suspended while goods transit through the EU. Let us take cigarettes as an example. When they get to the port of Algeciras in Spain, they are alleged to have left the European Union by a rubber stamp appearing on the document. They do not go abroad, but return into the European Union. The tax evasion on one lorry load of cigarettes is more than a million euros.
	I spent a happy, but regretfully relatively useless, 18 months chairing a committee of inquiry into transit fraud. I regret to say that the Governments of the member states have not done everything that they could with that report, although they constantly recognise, in budgetary terms, the loss to our national Exchequer of value-added taxation and other taxes on goods. That sort thing must be looked at.
	Secondly, we must look once again at the structure of the Court of Auditors itself. With a Court of Auditors for six members states, having one from each member state was okay. It still worked when it was nine, and 10, 12 and 15; but to have a member of the Court of Auditors from each member state in a court of 25, and then 27, each with their own cabinet, creates a top-heavy structure. I hope that Sub-Committee A can at some time return to its excellent work in looking at the Court of Auditors and come up with new ideas on the structure for the audit court itself. We need something based more on the European Investment Bank system, where the political direction comes from Ministers of finance or their representatives and a professional head of audit service is then allowed to get on with the job without 27 appointees of 27 members states fighting over who does what. Reforming the Court of Auditors would be a substantial contribution.
	I conclude as I started by congratulating the committee on an excellent report. It clearly givesthe lie to the nonsense pedalled by the noble Lords, the members for UKIP, who are never reluctant to pedal the same old myth, even though all the evidence is stacked against them.

Lord Dykes: My Lords, I pay tribute to the expertise that the noble Lord, Lord Tomlinson, has developed over many years, which comes from being an MEP with a good deal of detailed knowledge of these matters. In pursuing domestic politics, too, he developed increasing knowledge of these matters. He has made some sensible suggestions, particularly in the latter part of his speech, which I hope will be replied to, provisionally or putatively at least, by the Minister tonight.
	This EU report again highlights the importance of the House of Lords system of detailed scrutiny of EEC legislation. I am glad to see the noble Lord, Lord Grenfell, once again listening to the debate. The committee considers not only legislation but other instruments; communications are an important factor now as well. I congratulate the noble Lord, Lord Radice, and his colleagues on a very interesting report. It gave us a good deal of relief from all the stories one sees in the comics masquerading as newspapers in Britain about irregularities in the wicked city of Brussels. Those stories are shown to be grossly exaggerated both at the margin and in general.
	The report is both interesting and detailed. It is good to be able to reply to the debate as the noble Lord, Lord Radice, and I go back a long way. We are both keen Europeans and have been chairmen of the European Movement in Britain. Despite that role, we have always remained enthusiastic supporters of a proper examination of the measures needed to affect member states particularly in financial terms and the proper accounting procedures.
	However, in this case we return once again to an old theme which the Sun newspaper never likes to admit—that the basic problems are found mainly in the member states. That is overwhelmingly the case, and is bound to be, because the greater recipients of the main elements of the budget—agriculture and the structural funds—are handled directly by the member states. The main blame for any irregularities at the margin therefore does not lie with the so-called onerous—but in fact relatively modest—Brussels bureaucracy. We should also continually remind ourselves that, within the European budget, the receipts equal the payments. It is therefore much more virtuous than most member states' budgets, which sometimes have a considerable debt element attached to them.
	I was also delighted that my two colleagues, the noble Lords, Lord Maclennan of Rogart and Lord Watson of Richmond, although not here tonight, were both member of the sub-committee and were sturdy fighters for the truth on Europe, rather than the Daily Mail inventions on Europe that we read constantly. The noble Lord, Lord Kerr—known as the scribe of the EU constitution—also was a member. They all made their contributions as well.
	I am glad, too, that the report goes into some of the endless myths about the Court of Auditors' inability for so many years to certify the Union's accounts in the form of the Commission's spending budget. The committee, under the chairmanship of the noble Lord, Lord Radice, rightly rejected the fatuous stories of a culture of corruption at the heart of Brussels and referred to a number of serious technical and administrative problems which need attention to restore an often battered public confidence. It is unfairly battered, based not on facts but on the usual lies about the Union's operations in our so-called newspapers, which are really entertainment magazines.
	The noble Lords, Lord Pearson and Lord Willoughby de Broke, are the only visible and tangible oasis of peace and calm in the current UKIP panoply, with the turmoil that we see in the European Parliament. I presume that they are taking time off from advising their party on how to deal with allegations of fraud by their MEPs, apparently including the purchase of motor cars. They threaten defections. An even worse nightmare, there is a rumour that Robert Kilroy-Silk might seek to rejoin them one day. I do not know how they would react to that. With the drastic reduction in their numbers in Strasbourg, the two noble Lords will presumably have considerable advice to give their colleagues when they next see them. But they will need to have read this report much more carefully and objectively than they have done. I very much regret the tendentious way in which they examine these matters and the cavalier answer of the noble Lord, Lord Willoughby. It is pretty generous of the Commission to continue to pay €260,000 per year to a lady whose background was questionable in many ways. We have gone into that long enough and I do not wish to go on too long in case someone is tempted to intervene. We have aired this subject already.
	I especially welcome the report's conclusions, enunciated from paragraph 6 onwards, about improvements in the technical oversight configuration, focusing on the appropriate and pinpointed level of responsibility and control in the reforms brought in by the noble Lord, Lord Kinnock, as Commissioner. His evidence to the sub-committee was particularly helpful.
	The Treasury memorandum submitted at the start of evidence says it all:
	"The audit methodology is very precise and so tends towards a negative assessment and secondly the quality of financial management is not consistently good enough. This is ashared responsibility between the Commission and the member states".
	However, it goes on to say that,
	"most of the budget is managed satisfactorily".
	In fact, as Commissioner Kallas pointed out in a striking evidence statement, the UK presidency period included progress on the integrated internal control framework, with the action plan preceding the much tighter control matrix for finances agreed in the 2007-13 financial framework. At long last the member states are painfully—perhaps slowly, but definitely—committed to furnishing annual audit figure summaries for the structural funds and the farming funds which, aswe have noted, represent the vast bulk of Union's outlays.
	In the evidence, some of the comments brought out the point that people in the private company sector often grossly exaggerate the veracity of private auditing procedures and what private firms of accountants certify. They also usually exaggerate the weaknesses in the EU systems because they dislike the Union or remain culturally biased against it. I therefore especially thank the committee for its suggestions in paragraphs 146 to 148 and for the fascinating admission provided in paragraph 149. Attempting total audit rather than the audit of individual departments is unwise for governments as well as for the court asking the Commission for such.
	The crucial request in the report for a list of member states revealing poor financial management of EU funds—subject to the achievement of accurate objective data, not an easy matter in itself—will assist an accurate cost-benefit analysis of each country's membership. It will counteract the negative conclusions we receive almost daily from the Euro-phobes in this country. I noticed that Ed Balls was firmly supportive of the work being done in Brussels on these various themes, as the noble Lord, Lord Radice, mentioned.
	Noble Lords will recall that when Ed Balls spoke to the annual conference of the Institute of Chartered Accountants last year, he praised this report, which had just been published, for its suggestions and promised that the new system for a statement of assurance on the national use of EU funds in the UK would be audited by our National Audit Office, as the noble Lord, Lord Radice, said.

Lord Pearson of Rannoch: My Lords, the noble Lord mentioned Mr Ed Balls' initiative, and I do not know whether the Minister will also mention it. Did they see the letter from Mr Dixon, the chief counsel of the Institute of Chartered Accountants, that was published recently in the Financial Times? Completely independently, he dismissed Mr Balls' initiative and concurred with Mrs Andreasen that the problems lie within the Commission, not within member states.

Lord Dykes: My Lords, I did not see that letter in the FT, but Mr Dixon's views on Europe are well known.
	The noble Lord, Lord Radice, reminded us of the famous example in Britain of the Department for Work and Pensions, a single department whose funds exceed the funds that we are talking about tonight. The noble Lord, Lord Williamson, rightly reminded the House that the Court of Auditors has in recent years praised the Commission's results on control.
	The report was replete with Mrs Andreasen's oral evidence; there was plenty of it. I did not find it at all convincing. I agree with the noble Lord, Lord Giddens, that it is difficult to measure fraud precisely. Although it was wholly a national problem for us, we can think of the vast amounts of money involved in the recent carousel fraud scandal related to UK VAT. The Treasury says that that has now been solved, but I doubt that it has been completely solved. I should think that there is still a considerable amount of it going on. The idea that there is one source of fraudulent activity called the EU Commission in Brussels and that fraud does not go on anywhere else, or in the private sector at all, is complete rubbish, as the two UKIP Peers must admit.
	The international firms of accountants whom we all love and admire often exaggerate their own activities. I well recall that Enron was certified and supported as giving accurate accounts by two famous international firms. Look what happened to it. There are many such examples. It is ridiculous to say that there is magical veracity and accuracy in the private sector and a problem in the European Commission because it is in the public sector.
	This is a well balanced and fair report. I think that it will be much used in other member states by the experts to follow through with their preferences for a more efficient and persuasive methodology in future. That is not, of course, the same as saying that no other country does this—the usual kind of haughtiness we hear in the press here and from the anti-Europeans. After all, many other member states, especially the large ones, have highly sophisticated systems which are as good as ours. The Dutch system has been given as an example.
	That is the great beauty of the Union: we can all learn from each other and pool the best from all in methods and practice. Accruals-based accounting has made a big difference, as the Government acknowledge. When talking to people outside, I find that the IFAC rules inspire greater confidence everywhere. The committee reminded us that administrative mistakes are just as important as the often-overstated cases of actual naked fraud. However, we must admit that both give the Community a bad name. Even if that is somewhat unfair, it has to be tackled and improved in future.
	I welcome greatly the committee's conclusion in paragraph 172 that the EU Council of Budget Ministers should be,
	"at least as concerned with the Union's accounts as it is with drawing up the Budget".
	I notice the noble Lord, Lord Tomlinson, nodding in agreement with that proposition. If we can get to that position as a routine matter of regular, repeated behaviour, then great strides will be made. Although that would virtuously go beyond what national budget Ministers are prepared to do normally in their own national context in most member states, it would help toinspire confidence in a system where putting together 27 different national accounting and verification procedures is a nightmare at any time. But it must be achieved.

Lord Howard of Rising: My Lords, last week the Minister took me to task, in the nicest possible way, for criticising the Olympics. He was right because, having had the opportunity to have a closer look at the report we are debating today, I can say that, by comparison with the financial management of the European Union, the Olympics is an example ofgood management, accurate forecasting and tight budgetary control.
	I offer my congratulations to the committee on its application and hard work in investigating this subject. Reading through the evidence I can only admire the committee's tact and patience. So much of the evidence from witnesses who appear reliable, honest and sensible is contradicted by other witnesses who also seem reliable, honest and sensible. For example, we have Mr Brian Gray, accounting officer for the European Commission, who, when asked whether double-entry book-keeping of the conventional kind does or does not exist, stated that,
	"the idea of having single entry accounts is risible. We have never had single entry accounts".
	The noble Lord, Lord Kinnock, also said that the European Commission has always used double-entry accounting. On the other hand, Mr Jules Muis, former head of internal audit for the Commission, said:
	"The system of the Commission, by my definition was not double entry bookkeeping".
	Marta Andreasen, who we have heard about so much this evening, gave evidence that double-entry book-keeping was not adhered to.
	Mr Terry Wynn MEP commented that the European Court of Auditors has concluded, every year since 1994, that the accounts are reliable. The qualified statement of assurance concerns mainly the underlying transactions. From that he comes to his conclusion that it is not correct that the accounts have not been given a positive statement of assurance; the failure is the underlying transactions—a number of your Lordships have commented on that this evening. This comment by Mr Wynn is difficult to reconcile with the statement by Siim Kallas, European Commissioner for Administrative Affairs, Audit and Anti-fraud, who in his evidence stated:
	"The Court effectively gave reasonable assurance on about one third of payments".
	The European Court of Auditors commented that errors were identified in accounts payable by 508 million euros and in pre-financing by 822 million euros. Mr Ashley Mote MEP stated that the Court of Auditors admits that 80 per cent of all taxpayers' money is never properly accounted for. Mrs Andreasen's evidence was that 90 to 95 per cent of the annual budget was refused clearance. Again, Mr Gray describes the accounting systems as rock solid. Both Mr Muis and Marta Andreasen argue that the systems are inadequate and "fragile"; they are supported in this by Mr Mote. The Commission's July 2006 report supports Mr Muis's opinion.
	Other examples of conflicting statements are over the mechanics of payment authorisations, whether the debts up to €1 million euros can be waived, whether the 416 imprest accounts are audited, on annual cash surplus, and so on. But I will spare your Lordships the full list and from going through all the detail.
	What comes clearly from all this is that there are two distinct views on the accounts and the reporting of financial matters in the European Union. There are those who believe that there have been minor and relatively unimportant errors in the past, with only minimal corruption, and that the road map will be sufficient to sort this out. Then there are those who say that the systems are fundamentally flawed and that there is a culture of corruption and incompetence. Whom are we to believe? What is certain is that there is a strong basis for concern. Accounts have not been passed for 12 years. We are talking not about an isolated incident but about a steady and consistent failure. Difficult though it may be, one would have thought that, once in every 12 years, the accounts would not have been qualified.
	There was the Santer scandal in 1999 when the Commission, headed by Jacques Santer, resigned amid allegations of fraud, nepotism and mismanagement. There was the Eurostat scandal, when millions of euros were paid to private companies owned by Commission officials—errors which, according to Marta Andreasen, occurred in the 15 per cent of the budget that is under the direct control of the Commission as opposed to under the control of member states. Accounting faults in member states should not obscure the fact that there are similar questions over accounts produced by the Commission.
	There is the issue of whistleblowers. I do not believe that someone like Marta Andreasen would sacrifice her career without deeply held and sincere beliefs. The committee has come up with some valuable recommendations, among which is the requirement for the reverse cascade of signing off accounts, the requirement that Commission officials and existing audit bodies take responsibility for the systems and accounts, and the simplification of rules and regulations. None of your Lordships has mentioned this tonight, but it is a fundamental problem with the whole situation. I would have liked the committee to recommend strengthening the protection for whistleblowers. In England, there is a requirement for listed companies—those quoted on the Stock Exchange—to have a mechanism in place whereby anyone reporting misdemeanours by officers of the company, however lowly or senior the officer or whistleblower's position might be, can do so without any fear of repercussions to the whistleblower.
	However, all these and the other recommendations are based on the assumption that there is a real and genuine desire for a more rigorous system of reviewing and checking accounts. There may well be such a wish but, given the mass of conflicting evidence, there may well not be. I do not know the answer, but there is a lot of smoke, so there might well be a fire. The Commission owes it to itself to address openly and transparently the claims that have been made. Perhaps it could do so through the use of outside agencies, as the noble Lords, Lord Pearson and Lord Willoughby de Broke, have suggested. If it does not, serious doubts will remain about its integrity. Unless such action is taken, claims that a culture of corruption exists will be believed. Evidence has been given that, on the whole, mistakes are irregularities and not fraud. The committee has accepted this, but how does anyone know? The money has gone but, frequently lacking a proper audit trail, no one knows where it is. It is impossible to say what is fraud and what is irregularity, as the noble Lords, Lord Giddens and Lord Willoughby de Broke, pointed out. If the integrity of the Commission is not vigorously established the assumption will increasingly be made that it is fraud.
	It might seem a little harsh when the committee has produced such an excellent report to introduce anything but praise, but two points are worth noting. It is a pity that such prominence is given in the report, and by the noble Lord, Lord Radice, to the statement by Sir John Bourn that he would not be able to give a clean bill of health to the United Kingdom's accounts, because 13, or 2.5 per cent, of the 500 accounts he examined are qualified. The United Kingdom's situation is not comparable to the European Union situation where somewhere between 66 per cent, if you extrapolate that figure from Commissioner Kallas's evidence, and 90 per cent, if you look at the European Court of Auditors' reports, have to be qualified. Of more relevance is his comment that it is very likely that listed companies—those quoted on the Stock Exchange—must,
	"be audited by International Auditing Standards".
	He went on to note that it is odd that standards for the private sector are not seen as appropriate for the public sector.
	The second regret is that the committee was unable to clarify the discrepancy between conflicting evidence presented to it. I am thinking in particular of the answer to the evidence from the noble Lord, Lord Kinnock, by Marta Andreasen which could not be included in the evidence accompanying the report. I had thought that this was because it arrived late or for some other good reason, although the noble Lord, Lord Pearson, has raised doubts about that. Mrs Andreasen's supplementary evidence contradicts the evidence of the noble Lord, Lord Kinnock.
	Two simple examples have already been commented on by the noble Lord, Lord Willoughby de Broke; namely, Mrs Andreasen's employment by the OECD and her rate of pay and ranking. These two examples are facts, which could easily have been verified, thereby adding or not to the credibility of witnesses. I urge the Minister to vigorously pursue the introduction of proper accounting systems; the enhancement of the protection of whistleblowers; the assuming of full responsibility for accounts by member states, which can be done without any surrender of sovereignty or interference from the Commission, and by the directors-general; and the improvement and proper independence and rigour of internal auditing. Whether Euro-phile or Euro-sceptic, all would agree that an institution of the size and importance of the European Union must be seen to be above reproach.

Lord Davies of Oldham: My Lords, that was the whole point. There is investment in the Games, and the issue being debated was how we will get value in terms of the legacy, which I did not think that the noble Lord addressed. But that is last week's debate and this is this week's. I am very grateful for the opportunity to respond to this important debate. As my honourable friend the Economic Secretary to the Treasury made clear at the time, the Government very much congratulate the committee on the cogency of its analysis and particularly the chairmanship of my noble friend Lord Radice in producing this thorough, timely and persuasive work.
	I am well aware that some noble Lords take a different view of the report, but they might well reject almost anything that achieves a balanced view on Europe as this report does. Much of the report appropriately recommends how constructive reforms ought to be made, and I shall come on to those in a moment. However, that could never be enough for some noble Lords because the report is not an unvarnished diatribe against all things European.
	The Government take a balanced view. We agree with the vast majority of the recommendations made in the report, and we have produced our own initiative to show how member states can better manage EU funds. I heard from the noble Lord, Lord Pearson, when intervening on the noble Lord, Lord Dykes, about one individual who wrote to a newspaper indicating that this initiative has not been universally welcomed, but would any initiative on Europe gain universal welcome in the nation? It certainly would not be welcomed by the noble Lord, Lord Pearson, but it has been welcomed by a wide range of people. Further, other Governments are looking at the British initiative and setting out to follow aspects of it. My noble friend Lord Giddens identified how member states are following our approach.
	Although we have until 10 pm, I do not intend to take that length of time, but I hope to be able to respond to the questions put to me. Before I attempt to respond to all noble Lords, I want to put the issue into context. The background to the committee's report is depressing. For the 12th year running the European Court of Auditors has again been unable to give a positive statement of assurance on the EU budget. That is a statement whose truth all of us regret. Although the court was, with some minor reservations, able to confirm the reliability of the accounts, the proportion of spending that was qualified—around two thirds—was essentially the same as in the previous year. That is deeply disappointing and is why we are insistent that improvements should be made. The administrative reform measures were pioneered by my noble friend Lord Kinnock, who in his absence has had rather a tough time in this debate. Would that he were here to respond to certain remarks tonight. However, nearly all the onslaught on my noble friend had nothing to do with his constructive approach to the European position, but concentrated solely on an individual case. I shall not speak from the Dispatch Box about an individual case, but I shall agree with all those—the noble Lords, Lord Pearson and Lord Howard, were prominent in making the case—who have said thatwe need to respect whistleblowers. We want to see that the European Community recognises the value of whistleblowers and their necessary protection. My noble friend Lord Kinnock recommended that, and we as a Government support it.
	It is unfair to be too critical of the fact that some of these reforms have not yet bedded down and it is too early to pronounce a verdict. However, it is clear that a great deal more needs to be done to improve EU financial management if we are to achieve the positive statement of assurance that our taxpayers deserve. I certainly agree with all those—even with noble Lords who pledge allegiance to UKIP—who say that our taxpayers deserve an assurance that the EU accounts can stand the test of proper auditing. It is unacceptable that EU spending is qualified in this way year after year, and the British Government are taking a lead to make sure that the situation improves.
	European spending is often accompanied in this country by somewhat hysterical accounts in the press of the degree of fraud and corruption. I would be the last to suggest that any contributor to the debate tonight deserves those epithets, but suffice it to say that almost every transgression referred to this evening with regard to the accounts has been alleged fraud. For example, the late submission of documents, missing the date—clearly an irregularity—was defined by certain noble Lords as irregularity shading inevitably into fraud, and the case is proven against the European Commission.
	I hear allegations about fraud, but not much substance. In none of the figures we can attest to does the percentage of the European budget that can be identified clearly as fraud seem greatly different from the percentage of nation states' budgets that are subject to fraud. We accept that the strictly annual nature of the statement of assurance exercise, which is required for the clearance of the accounts, is difficult when there are multi-annual spending programmes within the European budget, but that does not alter the fact that where fraud exists we need to see that it is expunged. We need processes in place to do that.
	I am sure it will be recognised that a fully positive statement of assurance is quite a tough test to pass. That is why the Controller and Auditor General said in his evidence to the committee that the National Audit Office would not be able to give a positive statement to the UK's accounts on the same criteria. We can take some comfort from the fact that the vast majority of the irregularities detected by the court are administrative errors rather than outright fraud. I recognise that that statement is a contentious one so far as several noble Lords who have contributed to this debate are concerned, but they need to produce a great deal more evidence than they have done, rather than make assertions about this problem.
	The second and more important reason why it is difficult to get a positive statement of assurance on EU spending is that around 80 per cent of EU spending goes on the CAP and structural funds, programmes with highly complex regulations and a huge number of beneficiaries, whose management is shared between the Commission and member states. These programmes are inherently vulnerable to irregularity of varying degrees of gravity. There are many good reasons for radical reform of the CAP and structural funds. Improving the EU's financial management is only one dimension of that, but we certainly need improvements in those areas.
	The Government are determined to demonstrate how individual member states can accept their responsibility to help improve the management of EU funds, especially the agricultural and structural funds. That is why we announced that the UK would take a lead in promoting the sound management of EU funds by demonstrating how they could be better managed at national level and how national Parliaments can be more closely involved in scrutinising EU spending. From next year onwards our Government intend to prepare and lay before Parliament an annual consolidated statement on the UK's use of EU funds, prepared to international accounting standards, which will be audited by the National Audit Office. The statement and audit opinion will also be made available to the Court of Auditors and the Commission. These arrangements will enhance audit and parliamentary scrutiny of our own use of EU funds and help us to detect and address any irregularities, thus improving financial management. We will all benefit from that extra scrutiny, and the Court of Auditors and the Commission will be able to take into account the National Audit Office's opinion when performing their own audit and controls. That initiative is welcomed by the Commission and the European Parliament. We are developing it in consultation with the court. As my noble friend Lord Giddens indicated, the Netherlands, Denmark and Sweden are also part of this process of reform, and other countries are showing considerable interest. It is, of course, fundamentally important that EU money is spent correctly, which is the main focus of today's debate.
	The debate ranged very widely. I was grateful to my noble friend Lord Radice when he introduced the debate and indicated that one of the crucial aspects of the committee's findings was that although there were irregularities and the accounts were unsatisfactory, there was no evidence of what constitutes the main contention that infuses so many of the arguments of critics of the European Union. It was expressed quite cogently and forcibly this evening. The noble Lord, Lord Pearson, will nod in response to that accolade, but the noble Lord, Lord Willoughby de Broke, played his full part and the noble Lord, Lord Stoddart, is not shy in his corner. They demonstrated that the contention of great critics of the Community is that fraud is part of the culture. The statement in this report, produced by your Lordships' Select Committee under my noble friend's chairmanship, denied that, and rightly so.
	I recognise that there is no way in which we can reach consensus on such fundamental aspects of the committee's position. I hear what the noble Lord, Lord Pearson, says when he indicates that your Lordships' committee is stacked with the compliant and the Europhiles, but my fellow Peers exercise judgment on these issues. In any case, they are not all Europhiles. I hesitate to use the word "sceptic" because it is such a loaded phrase when used with regard to Europe, but a number of noble Lords are rather more detached in their enthusiasm with regard to Europe. It will not do for the noble Lord, Lord Pearson, to suggest that my noble friend Lord Radice and his Select Committee have been involved in a defence of the European Community.

Lord Pearson of Rannoch: My Lords, I can help the Minister before he rises to answer that question—he might like the other barrel from this side of the argument. Would the noble Lord care to comment on the institutionalised fraud of all MEPs' travel expenses? The EU machine only pays the business rate plus an allowance for mileage, right across the entire European Union. That is in the culture. Mr Knapman and all those other people from UKIP are only going along with that sort of thing. I do not condone it, but they are simply going along with the well-known culture of the European Union.

Lord Davies of Oldham: My Lords, I agree with that—it is a constructive contribution to this evening's debate. Another constructive contribution came from the noble Lord, Lord Williamson, who stressed the supervisory role for the Court of Auditors over national audit organisations, in auditing EU expenditure. We believe that the court should continue to develop its relationship with national audit institutions—but of course such institutions inevitably report in democracies to their national parliaments, so a formal supervisory role for the court would clearly be inappropriate. So there are limits on that dimension—but I am grateful for the point that he made.
	I agree with the noble Lord, too, about extending the internal control system for agriculture. It is being steadily extended to cover an ever-greater proportion of agricultural spending. As agriculture is such an important part of EU expenditure, we cannot make progress unless we have improvements in that area.
	The noble Lord, Lord Pearson, covered a very wide range of issues from his well-known standpoint on Europe. He suggested that the Commission stood idly by while the rampant culture of corruption persists. I have already indicated that the committee's report does not give much support to that idea—but what is this about the Commission doing "nothing"? There were the reforms introduced by the noble Lord, Lord Kinnock, and the annual activity reports by each director general. Accrual accounting has been introduced—and the Commission was one of the first public bodies in Europe to introduce that concept. There is also the action plan to improve internal financial control and Barroso's political commitment to getting a positive statement of assurance. So what is this suggestion that somehow the Commission is just complacent in that regard? How could it be in circumstances in which there are, in the European Parliament and nation state legislatures, debates such as the one that we are having this evening, identifying the weaknesses that obtain?
	I do not accept the noble Lord's concept that all that Europe does is stand idly by while these charges are made. It may stand idly by when it detects that charges are made from an ideological perspective that wishes that it did not exist, but it does not stand idly by when a considered report comes from a House of Lords committee comprising people who have thought about and investigated the issues intensely and produced a coherent and cogent report such as the one that we are debating this evening, which gives us a base for challenging the Commission.
	As I said earlier, I agree with the noble Lord, Lord Pearson, on his contention about whistleblowers. I shall not comment on the Marta Andreasen case in detail, as this Dispatch Box would not be the place from which to comment on what we all recognise is a complex issue. In any case, this Government are not her employer—the European Commission is, and it is the Commission's business to sort this out. However, I accept that we should learn from the case in terms of practice—and I accept a good deal of what the noble Lord, Lord Pearson, said about the necessity for the protection of whistleblowers. He was supported from his own Front Bench in those terms.

Lord Davies of Oldham: Well, my Lords, we should take joy in those occasions when we have a united position on the other side of the Chamber and I am able to respond in one sentence to more than one individual Member of the Opposition.
	My noble friend Lord Giddens made some constructive comments, rightly identifying that fraud, even if it is at a more marginal level than has been contested by some contributors in this House, is not acceptable. We need to crack down on it. If it is0.3 per cent of the budget it is still too high—and it is important that we recognise that initiatives should be taken to deal with it. He supported the extent to which the UK was making progress on that matter. What we do identify clearly as fraud in the European Community does not look much greater than that which obtains within its nation states.
	The noble Lord, Lord Willoughby de Broke, mentioned Eurostat prosecutions. I am afraid that OLAF does not prosecute; that is not its role. The Eurostat case has been passed to member states and national prosecutions are under way in France, Luxembourg and Portugal. Once fraud has been detected, that is the only way in which it can be properly prosecuted. Predictably, the noble Lord, Lord Stoddart, also emphasised fraud. We attach great importance to that issue. He said that we should keep up pressure on the EU to put its house in order. I agree with that. That is why, both under our presidency of the EU in 2005 and subsequently, we put EU financial management high on our list of priorities. We are demanding improvement in that regard.
	My noble friend Lord Tomlinson gave a vigorous riposte to those who argued strongly against the EU. I was grateful for the way he introduced balance into the debate. One of his constructive comments was that the Court of Auditors should be reformed. We agree with that but my noble friend will recognise that that requires treaty change so it is not an easy thing to achieve. That takes us into a debate on the European constitution. I for one shall not engage in that dimension this evening, particularly given the length of time I have spoken at the Dispatch Box.
	I was grateful to the noble Lord, Lord Dykes, for reminding us of the need to compare standards in Europe in this regard with those in private industry. That is a salutary indication of the fact that fraud can exist in other organisations, some of which may look as if they are subject to the full range of audit inspection which some noble Lords advocated so strongly. However, that does not mean to say that fraudsters cannot operate successfully on occasion.
	I have already said that the noble Lord, Lord Howard of Rising, made several important points on fraud in the European Community and the necessity to validate expenditure. He said that 90 per cent of the budget was qualified. That is not quite so. Administrative expenditure was cleared, as was a majority of pre-accession spending and around 65 per cent of CAP expenditure. This means that about35 per cent of the total EC budget was cleared in both 2004 and 2005. That is an improvement over previous years. It is far from being good enough; his strictures are taken on board. That is why we are taking action to get reform.
	This has been a stimulating debate. I would have a great deal more to say about these issues if it were not for the fact that noble Lords expressed themselves with such vigour. As the report recognised, some progress has been made. It is not enough in the Government's view. We are already taking initiatives to improve things in Europe. The report has helped to contribute towards a strategy of improvement to the European budget and its procedures, which are very necessary.